ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934

For
the fiscal year ended December 31, 2005

o

TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934

For
the transition period from
__________to_________

Commission
file number

000-25855

VendingData
Corporation

(Name
of small business issuer in its
charter)

Nevada

91-1696010

(State
or other jurisdiction of incorporation or organization)

(I.R.S.
Employer Identification No.)

6830
Spencer Street

Las
Vegas, Nevada 89119

(Address
of principal executive offices, including zip
code)

Issuer’s
telephone number: (702) 733-7195

Securities
registered under Section 12(b) of the Exchange
Act:

Title
of each class

Name
of each exchange on which registered

Common
Stock, $.001 par value

American
Stock Exchange

Securities
registered under Section 12(g) of the Exchange
Act:

Common
Stock, $.001 par value

(Title
of each class)

Check
whether the issuer is not required to file reports pursuant to
Section 13
or 15(d) of the Exchange Act. o

Check
whether the issuer (1) filed all reports required to be filed by
Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past
12
months (or for such shorter period that the registrant was required
to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes No
o

Check
if there is no disclosure of delinquent filers in response to Item
405 of
Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III
of this
Form 10-KSB or any amendment to this Form 10-KSB. x

Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act) Yes o
No
x

State
issuer’s revenues for its most recent fiscal year:
$2,238,746

State
the aggregate market value of voting stock held by non-affiliates
computed
by reference to the average bid and asked price of such common
equity, as
of a specified date within the past 60 days. $21,526,916 ($2.25
per share
as of March 15, 2006)

State
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. 19,015,540 shares as
of March
15, 2006

Transitional
Small Business Disclosure Format (check one): Yes o No
x

TABLE
OF CONTENTS

Page

PART
I

3

Item
1.

Description
of Business

3

Item
1A.

Risk
Factors

14

Item
2.

Description
of Property

18

Item
3.

Legal
Proceedings

18

Item
4.

Submission
of Matters to a Vote of Security Holders

18

PART
II

19

Item
5.

Market
for Common Equity and Related Stockholder Matters

19

Item
6.

Management’s
Discussion and Analysis or Plan of Operation

20

Item
7.

Financial
Statements

26

Item
8.

Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure

26

Item
8A.

Controls
and Procedures

26

Item
8B.

Other
Information

27

PART
III

28

Item
9.

Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section
16(a) of the Exchange Act

We
develop, manufacture and distribute products and services to the gaming industry
that automate the current manual processes supporting the casino table games
business. Our product line is intended to improve security, productivity and
profitability of casino operations. Our principal products include:

·

The
Deck Checker, a card security device that scans decks of playing
cards to
ensure an accurate count and verifies that all of the cards are present.

·

The
Random Plus Shuffler, is the next generation of shuffling device
that is
an updated version of our previously offered Random Ejection Shuffler
and
the Continuous Random Ejection Shuffler. The Random Plus Shuffler
is
capable of shuffling between one and eight decks of cards. The device
also
offers additional features such as the switch in power from alternating
current, or AC, to direct current, or DC, conversion to an external
power
supply, redesign of the cabinet, and the addition of an external
lever to
adjust the shuffler for card
thickness.

·

The
PokerOne Shuffler, a high-speed card-shuffler designed for use with
single
deck poker variation games.

·

High
frequency RFID casino chip, a traditional casino chip imbedded with
a RFID
tag that allows casinos to identify counterfeit casino chips and
assist
casinos in tracking table play. The chip will begin to be sold in
2006.

·

The
ChipWasher is a product that washes and sanitizes gaming chips. This
product is expected be available by the second half of
2006.

We
have
an active research and development program for our current products as well
as a
focus on product line expansion.

We
are
headquartered in Las Vegas, Nevada with manufacturing operations in Guangdong
Province, China. We
maintain our principal offices at 6830 Spencer Street, Las Vegas, Nevada 89119.
Our telephone number and facsimile number are (702) 733-7195 and
(702) 733-7197, respectively, and our website is www.vendingdata.com.
Information contained in, or accessible through, our website does not constitute
part of this report.

We
own or
have rights to certain trademarks that we use in connection with the sale of
our
products, including, but not limited to, the following: VendingData™,
Deck
Checker™,
Random
Ejection™,
Random
Plus™
and
PokerOne™,
ChipWasher™
and
DeckSetter®.
This
report also makes reference to trademarks and trade names of other
companies.

RECENT
DEVELOPMENTS

On
March
29, 2006, we entered into an agreement to issue and sell our secured promissory
notes for aggregate gross proceeds of $7 million. These notes will bear interest
at an annual rate of 7% and mature on March 31, 2011. We expect to issue these
notes and receive the net offering proceeds in early April 2006. In connection
with this debt financing, we also entered into a definitive agreement with
the
purchasers of our notes whereby we may, at our sole option, require them to
purchase up to $5 million of our common stock. This agreement, sometimes
referred to as equity line of credit, has a term of five years and grants us
a
binding “put” right to sell our shares at a 20% discount to the volume weighted
average price of our shares on the day of a drawdown, subject to a ceiling
price
of $3.50 per share. In addition, we have reached an agreement in principal
to
issue and sell an additional $6 million of our common stock at price of $2.50
per share for a total of 2.4 million shares.

-3-

The
financings described in the preceding paragraph are conditioned upon the
concurrent pay off or conversion into common stock of all of our outstanding
senior secured convertible promissory notes. As of the date of this report,
we
had approximately $11.6 million principal amount of senior secured convertible
promissory notes outstanding. Of this amount, the holders of these notes are
expected to convert approximately $5.6 million in principal and interest into
shares of our common stock and we expect to pay off the remaining $6.0 million
outstanding balance with a portion of the proceeds from the financings described
above.

In
addition to retiring our preexisting notes, we expect to use approximately
$5
million of the proceeds from the financings described above to pay down our
existing line of credit. The balance of $7 million of proceeds would be
available to us for general working capital purposes. We believe that we will
have sufficient funds to meet our working capital needs for the next 12 months.

On
October 1, 2005, we entered into a patent purchase agreement with William
Westmore Purton, an individual, Dolphin Products Pty Ltd, an Australian
corporation (“DPP”), and Dolphin Advanced Technologies Pty Ltd, an Australian
corporation (together with DPP, “Dolphin”), pursuant to which we agreed to
purchase from Dolphin patents for certain microchip technology for use in the
gaming industry (the “RFID Patents”). Pursuant to the purchase agreement, we
agreed to purchase the RFID Patents in exchange for $750,000 in cash and the
issuance to Mr. Purton of 1,000,000 shares of our common stock. The cash
purchase price was payable in installments, starting with a non-refundable
payment of $125,000 on the execution date of the purchase agreement. A second
installment of $125,000 was payable seven days after the date on which we
notified Dolphin that we are satisfied with the results of our due diligence
investigation. The remaining balance of $500,000 is payable in six (6) equal
monthly installments beginning on January 31, 2006. With the exception of the
initial payment, payment of the cash purchase price was subject to (i) our
satisfaction with our due diligence investigation, and (ii) the execution and
delivery by Dolphin and us of a licensing and manufacturing agreement pursuant
to which we would license the Patents to Dolphin for the manufacture of casino
gaming chips. The 1,000,000 common shares were issuable at the time the second
installment of the cash purchase price is paid.

On
February 27, 2006, we entered into a licensing and manufacturing agreement
with
Dolphin Products Pty Limited, of Melbourne, Australia. Pursuant to the
agreement, Dolphin has received the exclusive rights to manufacture our RFID
chip product. The agreement has a term of 10 years. Our entry into the licensing
and manufacturing agreement with Dolphin effectively consummates our purchase
of
the RFID chip and related patents and technology from Dolphin and its
affiliates, William Purton and Dolphin Advanced Technologies Pty Limited. We
issued 1,000,000 common shares to Mr. Purton in February 2006.

BUSINESS
STRATEGY

Our
strategy is to increase revenue and margins based on three key
factors:

·

Development
of product lines with limited competition. Our
ability to offer new products such as the high frequency RFID casino
chip
and the ChipWasher, which provide us with two product lines with
limited
or no competition, respectively.

·

Expansion
into additional domestic and international gaming markets for our
products. The
worldwide expansion of gaming should provide new markets for our
products,
and we have targeted sales opportunities in these new markets in
addition
to our traditional established gaming markets. To help address these
markets we continue to look at various distributional channels in
the US
and internationally.

·

Implementation
of cost reduction initiatives to increase gross margins.
Through
the implementation of cost reduction initiatives, our management
believes
that the gross margins on our products will improve over time. We
continue
to reduce the cost of our component parts through the use of production
facilities in China.

-4-

TABLE
GAME SUPPORT PRODUCTS

Shuffler
Product Line

We
believe that the motivating factors for casino operators to adopt automatic
shufflers on gaming tables include the desire to increase dealer productivity,
reduce exposure to fraud and cheating by dealers, players or both and reduce
reliance on experienced dealers. The ability to turn more hands, or decisions,
per hour and reduce the advantage knowledgeable players have with respect to
poor manual shuffles will more likely generate higher “holds,” the percentage of
wagers that the casino earns, from automated shufflers than from manual
shuffles.

RandomPlus
Shuffler. The
RandomPlus utilizes state of the art electronics for improved reliability and
longevity. It has been designed with reliability in mind. The RandomPlus has
fewer moving parts than its predecessor and is designed with additional user
accessible adjustments to accommodate a wider variety of card types and
conditions. It will include additional features, such as the switch in power
from alternating current, or AC, to direct current, or DC, conversion to an
external power supply, redesign of the cabinet, and the addition of an external
lever to adjust the shuffler for card thickness.

PokerOne
Shuffler.To
complement our current shufflers, we developed the PokerOne shuffler, a
specialty game shuffler utilizing new and existing technology to provide
shuffles of pre-dealt hands of cards for specialty poker games. Specialty game
shufflers are only used in single deck poker variation games such as Caribbean
Stud™, Let It Ride™, Pai Gow Poker and Three Card Poker. The PokerOne shuffler
is designed to re-stack the deck and deliver the required number of cards (3,
5
or 7 cards) into packets using a batch system method. We believe that the
PokerOne shuffler will significantly raise the standard for specialty game
shufflers and will compete with the Ace® Shuffler, manufactured by Shuffle
Master, Inc. We have designed the PokerOne shuffler to:

·

shuffle
and prepare the cards into the individual packets required for the
specialty poker game;

·

provide
sufficient speed to maintain the pace of the game even if just a
single
player is playing;

·

verify
the overall quantity of the cards shuffled and the number of cards
in each
packet; and

·

verify
the actual cards dealt to each
player.

The
PokerOne shuffler is designed for the active specialty table game market where
non-traditional card dealing is accepted. The PokerOne shuffler shuffles and
deals packets of cards to each player. As a result of the characteristics of
the
PokerOne shuffler, we believe that we will be able to provide substantially
improved speed and security for our customers in the specialty table game
market. As discussed elsewhere herein, our ability to sell the PokerOne shuffler
in the United States is currently the subject of pending litigation. We began
to
install the PokerOne shuffler in foreign markets in 2004 and began installing
in
the US in the second quarter of 2005.

-5-

Shuffler
Market.
We
estimate that there are over 45,000 gaming tables worldwide and that the market
penetration of installations of automatic shufflers is low. We estimate that
of
the automatic shufflers installed, most of these installations are on specialty
gaming tables. Several companies have introduced automatic shufflers for the
general market, but for the most part, these efforts have been unsuccessful.

There
are
several factors that have resulted in low acceptance of automatic shufflers
for
the general market, including security issues, reliability/productivity and
player confidence. We believe that our technology and ergonomic design will
allow our products to overcome these industry concerns:

·

Security.We
believe that our combination of patented computer and mechanical
technology safeguards against cheating schemes. The random ejection
technology used in all of our shuffler products produces a
computer-generated, random and untrackable shuffle, and the Continuous
Random Ejection Shuffler technology eliminates advantages achieved
by
knowledgeable players, as each card is available for the next round
of
play by producing “full” decks of continuously shuffled random cards. This
has the added benefit of giving the casino a higher hold from the
gaming
table since the shuffler preserves the original odds of each game,
which
favor the casino.

·

Reliability/Productivity.
Given the paper handling demands placed on card shufflers, shufflers
are
prone to jamming and breakdown. We have designed our shufflers to
be
easily accessed by dealers so they can hand-deal cards until the
unit can
be put back inserviceand
prevent a table from shutting down. In addition, the dealer, with
little
interruption, can easily put the unit back into play in most
cases.

·

Player
Confidence.
To
reduce cheating schemes, many existing shufflers completely cover
or
shield from players the deck(s) being shuffled, thereby reducing
player
confidence in a fair game. The design of our shufflers allows players
to
see the cards being ejected and re-stacked through a frosted cover
without
compromising security, which we believe will gain better player
acceptance.

Shuffler
Installations.
As of
December 31, 2005, we had installed a net total of 683 units, representing
the
number of revenue generating shufflers installed at casinos through sale or
rental agreements. Of the units installed as of December 31, 2005, 161 units
were installed pursuant to rental agreements, and 522 units were sales. In
terms
of location, as of December 31, 2005, we have installed our shufflers in 85
different gaming properties, including the MGM Grand in Detroit, Michigan;
the
Excalibur, the Luxor and the Venetian in Las Vegas, Nevada; the Viejas Casino
in
Alpine, California; the Great American Group, Washington; and the Treasure
Island Resort & Casino in Red Wing, Minnesota.

Competition
- Shufflers. Competition
in the shuffler market is intense. The shuffler market is divided into two
separate segments, traditional table game and specialty table games. Shuffle
Master, Inc. is the current market leader in both the traditional table game
and
specialty table game markets. Our other competitors have a small collective
market share of the table game market. With respect to the traditional table
game market segment, we compete with Shuffle Master, Inc., which markets the
Shuffle Master KingÔ,
and the
One2Six ShufflerÔ
and Ten
Stix, Inc., which markets the Pro Shuffler Shuffling System. Shuffle
Master, Inc. also offers the ACE®, which is currently the only product in the
specialty table game market.

The
Deck Checker

The
Deck
Checker is a card security device that specifically scans playing cards to
ensure an accurate count and verify that all of the cards in a deck of cards
are
present. This innovative product confirms the integrity of each card and will
reject any non-conforming cards. The Deck Checker has multiple uses and can
be
used in the back of the house (casino support departments) to reduce labor
costs
by expediting the verification process of used cards, or it can be used in
the
front of the house (the casino floor) to ensure that all table games open with
complete and accurate decks, reducing the amount of time it takes to open a
table game, thereby increasing productivity. The Deck Checker allows the re-use
of playing cards by providing a secure and reliable method of putting used
cards
back into play, reducing card usage and the associated costs. In addition,
the
Deck Checker can scan from up to eight decks at a time, each deck in less than
15 seconds. The device is programmed for all standard playing cards,
accommodates plastic, paper and plastic coated playing cards and is programmed
with many standard card games.

-6-

The
Deck
Checker has an integrated management system and an on-board storage/vault
system. The integrated management system gives a report for every transaction
to
provide an audit trail. Further, the Deck Checker requires limited training
time, as the machine prompts the user throughout the entire checking process.
Since the Deck Checker does not require additional staff, the Deck Checker
is
designed to increase efficiency and shorten the start-of-the-day and the
end-of-the-day procedures.

We
have
been issued one patent each in the United States and South Africa and have
five
patent applications pending in the United States, Australia, Canada, China
and
Europe.

Market
and Distribution of the DeckChecker. We
estimate that the potential market for the DeckChecker to be one machine for
every ten table games, or approximately 5,000 machines installed worldwide.
In
November 2002, we entered into a five-year agreement with TCS Aces, an
Australian subsidiary of Technical Casino Services, Ltd., a United Kingdom
company that distributes gaming equipment worldwide, under which the DeckChecker
will be distributed internationally. As of December 31, 2005, we had 96
units of the DeckChecker installed at 61 casinos, 86 of which were purchased
and
10 of which were rented.

High
frequency 13.56 MHz RFID casino chips provide real-time data capability,
enhanced chip security, player tracking and accounting management benefits
for
casinos. The high frequency RFID chips enable casinos to read 1,000 chips in
a
second and have a memory capacity of over 10,000 bits. In comparison to the
existing RFID casino chip technology (the 125KHz RFID chip), the 13.56 MHz
chip
is faster, has much greater memory capacity, is more economic to produce and,
being more robust, it is more cost effective and easier to install. As an
example, if there are 100 chips in a particular player position - in the same
time that it takes the125 KHz technology to determine that there are 100 chips
in the field - the 13.56 MHz has not only determined the number of chips, it
has
also interrogated 3 or 4 levels of security features within each chip,
authenticated the unique identity of each individual chip, determined the value
of the bet and calculated the win or loss. The 13.56MHZ technology enables
real
time monitoring of table games. The high frequency RFID chips provide
significant cost advantages over predecessor technology.

High
frequency RFID Market. We
estimate that the addressable chip market is at least 100 million casino chips
worldwide. Initially the market will emerge from the build-out of new casinos
in
Macau. From 2006 through 2008 at least fifteen new casinos will be built in
Macau and it is expected that the new casinos will be migrating to the new
chip
technology to thwart counterfeiters and to track casino chip movement within
the
properties.

Competition
- High frequency RFID Market.
There
is limited competition in this market and a high barrier of entry. There is
currently one other provider of high frequency RFID casino chips.

ChipWasher

ChipWasher
is a product that washes and sanitizes gaming chips. The build-up of oils and
residue makes them sticky and difficult for dealers and players to handle,
which
makes for slower play. Casino surveillance and identification becomes
increasingly difficult and players’ gaming experience is considerably lessened.
Regular chip washing prevents this, but the traditional method of hand-washing
is time-consuming and costly. The ChipWasher is a practical and efficient means
toward cleaner and more hygienic casino chips. This product will be available
by
the second half of 2006.

-7-

Benefits
of this product include:

·

Ease
of operation inside the cage

·

Cost-effectiveness

·

Labor-savings

·

Greater
speed

·

Environmentally
friendly

·

Enables
greater surveillance identification

·

Hygienic

·

Ergonomically
designed

ChipWasher
Market. We
estimate that the addressable chip market is at least 100 million casino chips
worldwide. Currently, chips are either washed by hand or placed in commercial
clothes washing machines. We estimate that interest in an easy to use, high
speed chip washer will be significant and will be furthered with the
introduction of high frequency RFID chips that will require better care and
handling than traditional chips.

Competition
- ChipWasher. There
is
no equipment specifically manufactured for the washing of casino chips in the
market today.

RESEARCH
AND DEVELOPMENT

Some
of
our research and development operations were moved to our China facilities
at
the end of 2004. The intention is to have our China facility as the mechanical
and electronic engineering center and Las Vegas as the architectural and
software engineering center for research and development. We anticipate that
the
development and production of our products will be more efficient as a result
of
this delineation. Our current research and development emphasis is to improve
our existing product lines, as demonstrated by our completion of the PokerOne
shuffler, and development of and fourth quarter 2005 sales of the RandomPlus
Shuffler. We spent $1,394,006 in 2005 and $1,423,096 in 2004 on research and
development activities. We expect our research and development expenses to
increase as we develop enhancements to the current shuffler line, and develop
new products for 2006 release including the ChipWasher.

REGULATION
AND LICENSING

Overview

We
are
subject to regulation by governmental authorities in most jurisdictions in
which
our products are sold or used by persons or entities licensed to conduct gaming
activities. Gaming regulatory requirements vary from jurisdiction to
jurisdiction, and obtaining licenses, findings of suitability, registrations
and/or other required approvals with respect to us, our personnel and our
products are time-consuming and expensive. Generally, gaming regulatory
authorities have broad discretionary powers and may deny applications for or
revoke approvals on any basis they deem reasonable.

We
have
approvals that enable us to conduct our business in numerous jurisdictions,
subject in each case to the conditions of the particular approvals. These
conditions may include limitations as to the type of product we may sell or
lease, as well as limitations on the type of facility (such as riverboats)
and
the territory within which we may operate (such as tribal nations).
Jurisdictions in which we, and specific personnel where required) have
authorizations with respect to some or all of our products and activities
including Arizona, California, Colorado, Connecticut, Illinois, Indiana, Iowa,
Kansas, Louisiana, Michigan, Missouri, Nevada, New Mexico, New York, North
Dakota, Oregon, South Dakota, Washington, various Native American tribes, as
well as Argentina, Bahamas, Peru, Puerto Rico, Russia, Saskatchewan, Sweden
and
Vietnam.

-8-

Certain
Indian tribes throughout the United States that have compacts with the states
in
which their tribal dominions are located operate or propose to operate casinos,
and these tribes may require suppliers of gaming and gaming-related equipment
to
obtain authorizations. We have worked and will continue to work with these
tribes to obtain the necessary authorizations.

During
2005, we cooperated with certain state gaming authorities with respect to the
required re-licensing of our company in certain jurisdictions, as well as the
licensing of our new management team. We do not anticipate that this process
will have a material adverse effect on us. We continue to cooperate with all
gaming regulatory agencies as necessary and applicable to maintain good standing
in all jurisdictions in which we hold a license.

Associated
Equipment

In
most
jurisdictions, our products fall within the general classification of
“associated equipment.” “Associated Equipment” is equipment that is not
classified as a “gaming device,” but which has an integral relationship to the
conduct of licensed gaming. Regulatory authorities in some jurisdictions have
discretion to require manufacturers and distributors to meet licensing or
suitability requirements prior to or concurrently with the use of associated
equipment. In other jurisdictions, the regulatory authorities must approve
associated equipment in advance of its use at licensed locations. Except as
described below in “Other Jurisdictions,” we have obtained approval for our
associated equipment in each jurisdiction that requires such approval and in
which our products that are classified as associated equipment are sold or
used.

Gaming
Devices and Equipment

Certain
jurisdictions classify our products as “gaming devices” and/or “gaming
equipment”. Although regulations vary among jurisdictions, each jurisdiction
requires various licenses, findings of suitability, registrations, approvals
or
permits to be held by companies and their key personnel in connection with
the
manufacture and distribution of gaming devices and equipment.

Regulation
of Stockholders

In
most
jurisdictions, in which we are subject to regulatory oversight, beneficial
owners of our voting securities or other securities may, at the discretion
of
the gaming regulatory authorities, be required to file an application for a
license, finding of suitability or other approval and in the process subject
himself or herself to an investigation by those authorities. However, we believe
gaming regulatory authorities typically do not take such action unless a
beneficial owner owns more than 5% of our outstanding voting securities, at
which time many jurisdictions require certain reports to be filed.

Regulation
and licensing - Nevada

The
manufacture and distribution of associated equipment for use in Nevada are
subject to the Nevada Gaming Control Act and the regulations promulgated there
under and various local ordinances and regulations.

We
are
not required to register as a publicly traded corporation with the Nevada Gaming
Control Board because we do not fall within the definition of a manufacturer
of
a gaming device. The manufacture and distribution of associated equipment for
use in Nevada are subject to the Nevada Gaming Control Act and the regulations
promulgated there under and various local ordinances and
regulations.

-9-

We
do not
believe that we will be required by the Nevada Gaming Authorities to register
as
a public company or obtain a finding of suitability in Nevada so long as we
do
not manufacture or sell “gaming devices” as defined by the Nevada Gaming Control
Act. Nevertheless, even though applications for the approval of associated
equipment are subject to a less comprehensive approval process that focuses
on
approval of the equipment, the Nevada Gaming Control Board may investigate
us or
any individual who has a material relationship to, or material involvement
with,
us in order to determine whether such individual is suitable or should be
licensed. Besides the company, our officers, directors and certain key employees
may be required to file applications and be licensed or found suitable by the
Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application
for licensing for any cause that they deem reasonable. A finding of suitability
is comparable to licensing. Both require submission of detailed personal and
financial information, which is followed by a thorough investigation. The
applicant for licensing or a finding of suitability must pay all costs of the
investigation.

In
the
event that the Nevada Gaming Authorities were to find an officer, director
or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with us, we would have to sever all relationships with that
individual. In addition, the Nevada Gaming Commission may require us to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.

In
the
event that we are found to have violated the Nevada Gaming Control Act, the
licenses and/or approvals we hold could be limited, conditioned, suspended
or
revoked. In addition, we and the persons involved could be required to pay
substantial fines, at the discretion of the Nevada Gaming Control Board, for
each separate violation of the Nevada Gaming Control Act. The limitation,
conditioning or suspension of any license or approval held by us could (and
revocation of any license or approval would) materially adversely affect our
operations.

Any
beneficial holder of our voting securities, regardless of the number of shares
owned, may be required to file an application, be investigated, and have the
holder’s suitability as a beneficial holder of our voting securities determined
if the Nevada Gaming Control Board finds reason to believe that such ownership
would otherwise be inconsistent with the declared policies of the State of
Nevada. The applicant must pay all costs of investigation incurred by the Nevada
Gaming Authorities in conducting any such investigation. Any person who fails
or
refuses to apply for a finding of suitability or a license within thirty days
after being ordered to do so by the Nevada Gaming Commission or the Chairman
of
the Nevada Gaming Control Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. In the event that an individual is found to be unsuitable,
that individual would be required to transfer or otherwise dispose of all of
our
stock on such terms as may be required by the applicable Nevada Gaming
Authority.

Other
Jurisdictions

All
other
jurisdictions that have legalized gaming require various licenses,
registrations, findings of suitability, permits and approvals for manufacturers
and distributors of gaming devices and equipment as well as licensure provisions
related to changes in control. In general, such requirements involve
restrictions similar to those of Nevada. During the past year, certain events
in
connection with our regulatory approvals have taken place as
follows:

Mississippi.
We
have
applied to the Mississippi Gaming Commission for licensure as a manufacturer
and
distributor, and the investigation for our licensure is pending. Until this
application is acted upon, we may not sell or service our shuffler products
in
Mississippi. However, the Commission has determined that our
DeckChecker™
product is a type of gaming associated equipment that may be sold
in
Mississippi without our first receiving a license.

New
Jersey.
Upon a
satisfactory initial background investigation, in December 2005 we obtained
a
six-month transactional waiver approval from the New Jersey Commission to engage
in specific transactions with certain New Jersey casinos pending the outcome
of
the complete investigation of our license application. The transactional
approval process permits us to continue our business with New Jersey casinos
uninterrupted upon the completion of the investigation. If
licensure is not obtained before the expiration date of the transactional waiver
approvals, we will request transactional waiver approvals for an additional
6-month period.

-10-

Louisiana.
In
2005, the Louisiana State Police, Gaming Division, has given us a permit as
a
gaming manufacturer, gaming supplier and non-gaming supplier with respect to
all
gaming except for Indian gaming. Louisiana investigated us with respect to
certain omissions in our gaming application relating to a certain former officer
and directors. We received a Notice of Hearing Date before the Louisiana Gaming
Control Board Administrative Hearing Office for January 24, 2006. A settlement
agreement and related motions executed by VendingData and the Louisiana State
Police, Gaming Division, and passed affirmatively upon by the Administrative
Law
Judge retained by the Louisiana Gaming Control Board was approved, by the
Louisiana Gaming Control Board at its February 21, 2006, meeting. The settlement
allows VendingData to re-apply for a gaming license in 30 months.

Rincon
Tribal Gaming Commission, California.The
Rincon Tribal Gaming Commission denied our application in February 2005,
primarily due to certain omissions contained in applications filed by a former
senior executive officer. Our new management team is evaluating whether to
file
new applications with this jurisdiction.

United
States - Federal

The
Federal Gambling Devices Act of 1962 makes it unlawful for a person to
manufacture, transport, deliver or receive gaming machines, gaming machine
type
devices and components thereof across interstate lines unless that person has
first registered with the Attorney General of the Department of Justice of
the
United States. We register annually with the Department of Justice in accordance
with the Federal Gambling Devices Act of 1962.

Application
of Future or Additional Regulatory Requirements

In
the
future, we intend to seek the necessary licenses, approvals and findings of
suitability for us, our products and our personnel in other jurisdictions
throughout the United States and the world where significant sales are
anticipated. However, there can be no assurance that such licenses, approvals
or
findings of suitability will be obtained, and if obtained that they will not
be
revoked, suspended or conditioned or that we will be able to obtain the
necessary approvals in a timely manner, or at all, for our future products
as
they are developed. If a license, approval or finding of suitability is required
by a regulatory authority and we fail to seek or do not receive the necessary
license, approval or finding of suitability, we may be prohibited from selling
our products for use in the respective jurisdiction or may be required to sell
our products through other licensed entities at a reduced profit.

In
order
to maintain and expand the market presence of our products, we are committed
to
providing a high level of customer service and support. We have centralized
most
of our service functions in Las Vegas, Nevada for the purposes of ensuring
uniform repair of our products. As such, all major technical maintenance on
our
products is conducted by our local technicians. In this regard, we have provided
our customers with additional back-up products for use until we can return
the
serviced products to them.

With
respect to routine maintenance, we employ three customer service
representatives, four
regional service managers and seven remote technicians (in addition to the
technicians located in Las Vegas and Seattle Service Centers)
in
various locations in the United States. Our service technicians regularly visit
our customers to ensure our products are operating satisfactorily. In the event
that a customer service technician discovers a problem with one of our products,
the products are repaired in the field. Our service representatives also assist
our customers in training dealers and other casino employees how to use our
products.

-11-

Our
standard warranty period is 90 days for our products. If a problem arises during
the warranty period, we will fix the product at no cost. Certain components
that
we use to manufacture our products are acquired from third parties, and may
contain a longer warranty period. For example, the warranty period on all memory
chips is ten years.

In
addition, we maintain a training center in Las Vegas to provide support and
training to our distributors, who are responsible for servicing their own
products.

MARKETING
AND DISTRIBUTION

As
the
gaming industry becomes increasingly more competitive, our strategy is to
develop and deliver cost-effective, customer-focused, niche products and
services that increase the security, productivity and profitability for the
global gaming industry. As part of our strategy, we offer to lease or sell
our
products to casinos and other lawful gaming establishments.

Current
sales tactic is to perform live demonstrations of our products to potential
customers. These demonstrations occur at both at the customer sites and at
our
Las Vegas showroom. Our marketing department supports the sales effort through
direct mail advertising and presentations at domestic and international trade
shows. Future marketing plans include more effective sales demonstration tools
that take advantage of current computer, web, and video
technologies.

We
sell
and lease our products directly to gaming operators and indirectly through
distributors. In general, except as described below, we depend on distributors
to sell our products internationally and on our sales team to sell our products
domestically. Our distributors receive compensation through our volume discount
pricing structure, which allows them to sell the products to their customers
at
market driven prices. In fiscal year 2005, our direct sales accounted for 79%
of
our revenue and distributor-based sales accounted for 21%.

We
use
distributors to gain exposure of our products in certain foreign geographic
areas where we believe distributors with a local presence would be more
effective than our own sales force. Management believes that utilizing
distributors to sell our products internationally has two main
advantages:

·

Distributors
have the authority to operate in the respective market and are able
to
address and resolve regulatory compliance issues that may arise in
a
timely manner; and

·

Distributors
have the internal infrastructure and superior contacts necessary
to
effectively sell and service our products in certain
markets.

On
January 21, 2005, we entered into an exclusive five-year agreement with TCS
JohnHuxley, or TCS, a U.K. based worldwide distributor of products to the gaming
industry, to market and distribute our shuffler products outside of the United
States.

On
February 28, 2006, we announced that we had entered into a distribution
agreement with a technology company based in Hong Kong and Macau. The
distribution agreement has an initial three year term, with rollover provisions,
and provides exclusive distribution rights for our high frequency RFID casino
chip for certain Southeast Asia casino properties and non-exclusive distribution
rights elsewhere in Asia.

CUSTOMERS

Our
customers are domestic and international casino and gaming operators. Any
adverse changes in the financial condition of our major customers, any loss
of
our major customers, or any meaningful reduction in the level of sales to any
of
these customers could have a materially adverse impact on the business.

-12-

COMPETITION

The
gaming industry is extremely competitive. Although we have assembled an
experienced management team, which uses its knowledge of the gaming industry
to
tailor our products and services to the needs of the gaming industry, we compete
with many established companies, which possess resources substantially greater
than ours. Generally, we compete with other companies that are substantially
larger, have more substantial histories, backgrounds, experience and records
of
successful operations; greater financial, technical, marketing and other
resources; more employees and more extensive facilities than we now have, or
will have in the foreseeable future. The competitive pressures of the gaming
industry will require us to invest in additional research and development.
The
constant need to update and innovate may result in increased costs
for,
and
reduced margins on, our products and services.

PRODUCT
DEVELOPMENT, MANUFACTURING AND ASSEMBLY

We
maintain a state-of-the-art facility for our product development and final
assembly divisions in Las Vegas as well as in XiaoLan, China. We have 12
full-time engineers working in research and development of our shufflers, and
enhancements to our DeckChecker product line. We acquired certain intellectual
property from Dolphin Products Pty Ltd, in 2005, along with the patent on
ChipWasher and the DeckSetter.

We
manufacture all of our products except for the RFID chip, which is manufactured
on our behalf by Dolphin. With Dolphin’s assistance, we are now engaging in the
commercialization aspects of the RFID chip. In addition, we occasionally engage
consultants in research and development to complement our skill set in specific
areas of engineering activities. We have 57 full-time personnel in final
assembly, installation and service. We hire contract personnel on a varied
basis
depending upon production and installation volume.

SUPPLIERS

Most
components for the shufflers and our DeckChecker are sourced in China. Shuffler
and DeckChecker assembly is being done in China and final units are shipped
to
Las Vegas for distribution to the North America and European markets. The
manufacturing of RFID casino chips is outsourced to Dolphin, who specializes
in
plastic injection molding and is located in Melbourne, Australia. Dolphin has
established a very strong working relationship with Magellan Technology Pty
Ltd
in Sydney, Australia, who is the owner of the intellectual property for RFID
technology. Dolphin is sourcing their RFID tags from Progressive Gaming
International Corp (“PGIC”).

INTELLECTUAL
PROPERTY

We
have
secured, and endeavor to secure, to the extent possible, exclusive rights in
our
products, primarily through federal and foreign intellectual property rights,
such as patents, copyrights and trademarks. We have applied for various other
patents with respect to other concepts and products, including potential
non-gaming application of our technology. We believe that our intellectual
property is critical to our future profitability and growth.

With
respect to our shufflers, the United States Patent and Trademark Office has
issued seven patents, Patent Nos. 5,584,483, 5,676,372, 6,019,368, 6,293,546,
6,299,167, 6,698,756 and 6,719,288, in addition to two design patents, Patent
Nos. D488,193 and D490,481. These patents expire on dates between
April 2014 and April 2024. In addition, there are seven patent applications
on file with the United States Patent and Trademark Office. Our shufflers have
also been issued two patents in Australia and one patent in Canada. For
additional information with respect to the ongoing litigation involving Shuffle
Master, Inc., see “Item 3. Legal Proceedings.”

With
respect to the Deck Checker, we acquired the rights to the Deck Checker pursuant
to a purchase and sale agreement dated December 23, 2002 in which we
purchased all of the tangible and intangible assets related to the Deck Checker.
The purchase price was $1,009,800, where $504,900 was payable upon the
successful production of five fully operational units of the Deck Checker and
$500,000 was payable within six months after the first payment is due. The
first
payment in the amount of $504,900 was made on August 1, 2003 and the final
$500,000 payment was made in February 2004. In addition to the purchase of
these
assets, we purchased tooling, inventory and spare parts for $44,800. In exchange
for the payments, the seller has agreed to transfer all of the tangible and
intangible assets related to the DeckChecker and not to compete with us for
60 months.

-13-

With
respect to the ChipWasher and DeckSetter, we acquired the rights to these
pursuant to a patent and trade secret purchase agreement dated October 6, 2005
in which we purchased all of the tangible and intangible assets related to
the
ChipWasher and DeckSetter from Dolphin. The purchase price was $566,000, where
$200,000 was payable upon execution of the contract and $366,000 was payable
over twelve months after completion of due diligence. The first payment in
the
amount of $200,000 was completed on November 9, 2005 and the first installment
payment was initiated on February 9, 2006. In addition to the purchase of these
assets, we agreed to pay Dolphin a 10% royalty fee on the gross profit of each
unit.

With
respect to the RFID chip technology we acquired the rights to the technology
pursuant to a patent purchase agreement dated October 1, 2005 in which we
purchased the patent rights and all other intellectual property rights relating
to the RFID chip from Dolphin. The purchase price was $750,000 plus one million
shares of our common stock, where $125,000 was payable upon execution of the
contract and second installment of $125,000 was to be paid on the execution
of a
Licensing and Manufacturing Agreement. The final $500,000 was payable over
six
months after completion of the agreement. The first payment in the amount of
$125,000 was completed on October 12, 2005. In addition, we issued one million
shares on the execution of the Licensing and Manufacturing Agreement on February
27, 2006.

With
respect to the RFID chip technology, the United States Patent and Trademark
Office have an application for Patent No. 6659875. The RFID chip technology
has
been issued patents in Australia and the United Kingdom, and has a patent
application in Canada.

As
of
December 31, 2005, we had approximately 43 full-time employees in the
United States and 69 full-time employees in China. None of our employees are
represented by a labor union, and we consider our relationships with our
employees to be satisfactory. All U.S employees have signed confidentiality
agreements, which prohibit them from disclosing any of our confidential
information at any time during or after their employment with us. We have also
executed confidentiality and non-competition agreements with all key China
personnel.

ITEM
1A.RISK
FACTORS

In
this
report we make, and from time to time we otherwise make, written and oral
statements regarding our business and prospects, such as projections of future
performance, statements of management’s plans and objectives, forecasts of
market trends, and other matters that are forward-looking statements within
the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements containing the words or phrases
“will likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,”
“target,” “goal,” “plans,” “objective,” “should” or similar expressions identify
forward-looking statements, which may appear in documents, reports, filings
with
the Securities and Exchange Commission, news releases, written or oral
presentations made by officers or other representatives made by us to analysts,
stockholders, investors, news organizations and others, and discussions with
management and other of our representatives. For such statements, we claim
the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.

-14-

Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the results
reflected in any forward-looking statements will be achieved. Any
forward-looking statement speaks only as of the date on which such statement
is
made. Our forward-looking statements are based upon assumptions that are
sometimes based upon estimates, data, communications and other information
from
suppliers, government agencies and other sources that may be subject to
revision. Except as required by law, we do not undertake any obligation to
update or keep current either (i) any forward-looking statement to reflect
events or circumstances arising after the date of such statement, or (ii) the
important factors that could cause our future results to differ materially
from
historical results or trends, results anticipated or planned by us, or which
are
reflected from time to time in any forward-looking statement.

In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause
our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time
in
any forward-looking statement. Some of these important factors, but not
necessarily all important factors, include the following:

We
may require additional funding in the future to continue to operate our
business. As
of December 31, 2005, we had a working capital deficit of ($1,637,021). We
have
entered into an agreement to provide us with $18 million additional debt and
equity financing, and believe that this financing, in addition to our existing
cash and cash equivalents together with cash generated by operations, will
meet
our working capital needs, capital expenditures, and commitments for at the
next
12 months. In the event it is not sufficient, we will endeavor to raise
additional required funds through various financing sources, including the
sale
of our equity and debt securities and the procurement of commercial debt
financing. However, as result of our present level of debt and certain
restrictions on our ability to incur additional indebtedness under our
agreement, it is unlikely we will be able to obtain additional debt-based
capital, unless a significant portion of the proceeds are used to retire
existing debt. There can be no guarantees that such funds will be available
on
commercially reasonable terms, if at all. If such financing is not available
on
satisfactory terms, we may be unable to expand or continue our business as
desired and operating results may be adversely affected. Any debt financing
will
increase expenses and must be repaid regardless of operating results and may
involve restrictions limiting our operating flexibility. If we issue equity
securities to raise additional funds, the following results may occur:

·

the
percentage ownership of our existing stockholders will be reduced;

·

our
stockholders may experience additional dilution in net book value
per
share; or

·

the
new equity securities may have rights, preferences or privileges
senior to
those of the holders of our common stock.

We
have a history of significant operating losses and anticipate continued
operating losses, and we may be unable to achieve
profitability.
We have
a history of significant operating losses and anticipate continued operating
losses for the foreseeable future. For the years ended December 31, 2004
and 2005, we have incurred net losses of $9,538,200 and $17,567,230,
respectively, and our operations have used $10,660,135 and $14,752,740 of cash,
respectively. As of December 31, 2004 and 2005, we had accumulated deficits
of $54,120,549 and $71,687,777, respectively. Over the past several years,
we
have derived only limited revenues, which have been insufficient to sustain
our
operations. We may not generate sufficient revenue to sustain our operations.
No
independent organization has conducted market research providing management
with
independent assurance from which to estimate potential demand for our products.
The overall market may not be receptive to our products, and we may not
successfully compete in the target market for our products.

-15-

Our
leased shufflers are more susceptible to replacement by
customers.
All of
our leased shufflers are placed with customers under short-term lease
arrangements, which, unlike long-term leases or permanent sales of our products,
can easily be terminated by a customer. The manner in which such short-term
leases are structured puts our shufflers at greater risk of replacement due
to
pressure from competitors, changes in economic conditions, obsolescence and
declining popularity. Casino operators may terminate the use of our products,
and we may not be able to maintain and expand the number of installed shufflers
through enhancement of existing shufflers, introduction of new shufflers,
customer service or otherwise.

We
may be unable to adequately protect our intellectual property
right.
Our
success depends upon maintaining the confidentiality and proprietary nature
of
our intellectual property rights. Our ability to compete may be damaged, and
our
revenues may be reduced if we are unable to protect our intellectual property
rights adequately. To protect these rights, we rely principally on a combination
of:

·

contractual
arrangements providing for non-disclosure and prohibitions on
use;

·

patents
and pending patent
applications;

·

trade
secret, copyright and trademark laws;
and

·

certain
built-in technical product
features.

Patent,
trade secret, copyright and trademark laws provide limited protection. The
protections provided by laws governing intellectual property rights do not
prevent our competitors from developing, independently, products similar or
superior to our products and technologies. In addition, effective protection
of
copyrights, trade secrets, trademarks, and other proprietary rights may be
unavailable or limited in certain foreign countries. We may be unaware of
certain non-publicly available patent applications, which, if issued as patents,
could relate to our services and products as currently designed or as we may
modify them in the future. Legal or regulatory proceedings to enforce our
patents, trademarks or copyrights could be costly, time consuming, and could
divert the attention of management and technical personnel.

Adverse
results in current litigation could result in substantial monetary damages
and
impacts on the manufacture and sale of certain of our shuffler
products.
Shuffle
Master, our principal competitor in the shuffler market, filed two lawsuits
against us for patent infringement. The first suit has been settled (see Part
II
- Item 1. Legal Proceedings).Concerning the second lawsuit, we believe our
position to be meritorious and we have reasonable defenses to Shuffle Master’s
claims. However, we cannot determine whether we will ultimately prevail in
the
lawsuit, nor whether damages, if awarded, would significantly impact our ability
to continue to manufacture and sell particular products within the United States
and its territories. If we do not prevail, we will be unable to sell the
PokerOne shuffler products in the United States unless we change certain
components used in the shuffler or obtain appropriate licenses from Shuffle
Master to use the playing card shuffler apparatus.

It
is possible that our future products will be the subject of future patent
litigation if the products are sold and installed in the United States and,
if
commenced, could subject us to continuing litigation costs and risks.
Other
than the allegations made by Shuffle Master discussed above, we are not aware
of
any claims or basis for our current products infringing on the proprietary
rights of third parties. To the extent that we introduce new products that
incorporate the same or similar technology, it is likely that Shuffle Master
will bring one or more claims against us seeking damages, injunctive or other
equitable relief, or both. We cannot predict the outcome of any present or
future litigation that may occur.

If
our
future products incorporate technology that infringes the proprietary rights
of
third parties and we do not secure licenses from them, we could be liable for
substantial damages that would cause a material reduction in revenues and impair
our prospects for achieving growth and profitability.

-16-

In
furtherance of the development of our services or products, we may need to
acquire licenses for intellectual property to avoid infringement of third party
rights or claims of infringement. These licenses may not be available on
commercially reasonable terms, if at all. Claims for infringement, if made,
could damage our business prospects, our results of operations and financial
condition, whether or not the claims have merit, by:

·

consuming
substantial time and financial resources required to defend against
them;

·

diverting
the attention of management from growing our business and managing
operations;

·

resulting
in costly litigation; and

·

disrupting
product sales and shipments.

If
any
third party prevails in an action against us for infringement of its proprietary
rights, we could be required to pay damages and either enter into costly
licensing arrangements or redesign our products so as to exclude the infringing
technology. As a result, we would incur substantial costs and delays in product
development, sales and shipments, our revenues may decline substantially and
we
may not be able to achieve the growth required for us to achieve profitability

We
rely on
distributors in international markets, and our limited sales experience in
foreign countries could cause us to lose sales. Substantially
all sales of our products outside the U.S. are achieved through distributor
relationships. We believe the distributors that we have engaged are experienced
and reputable; however, if we are unable to manage these relationships, our
ability to generate revenue and profits in the non-U.S. market may be adversely
affected. To the extent that we engage in direct sales outside the U.S., we
have
limited sales experience and history in foreign markets.

Our
management holds a controlling interest in our common stock, giving our
management the power to control all matters submitted to our stockholders.
As
of
December 31, 2006, our executive officers and members of our board beneficially
own approximately 8,048,022 shares of common stock, or approximately 47% of
the
outstanding shares of our common stock. Accordingly, these stockholders have
the
power to control all matters requiring approval by our stockholders, including
the election of directors and approval of mergers and other significant
corporate transactions. This concentration of ownership may make it more
difficult for non-management stockholders to effect substantial changes in
our
company, and also has the effect of delaying, preventing or expediting, as
the
case may be, a change in control of our company.

Shares
eligible for sale in the near future may cause the market price for our common
stock to decline. In
addition to the number of shares registered on behalf of investors who purchased
the Senior Notes and excluding the shares held by our executive officers and
directors, as of February 28, 2005, we have approximately 9,530,970 shares
of
common stock that are either freely tradable pursuant to Rule 144(k) of the
Securities Act of 1933, or the Securities Act, or have previously been
registered by us through a registration statement filed with the SEC. As such,
the future sale of a substantial number of shares of our common stock in market
transactions, or the perception that these sales could occur, may depress the
market price for our common stock. These sales could also impair our ability
to
raise additional capital through the sale of our equity securities in the
future.

Our
board of directors may issue blank check preferred stock, which may affect
the
voting rights of our holders and could deter or delay an attempt to obtain
control of us.Our
board
of directors is authorized, without stockholder approval, to issue preferred
stock in series and to fix and state the voting rights and powers, designation,
preferences and relative, participating, optional or other special rights of
the
shares of each such series and the qualifications, limitations and restrictions
thereof. Preferred stock may rank prior to our common stock with respect to
dividends rights, liquidation preferences, or both, and may have full or limited
voting rights. Accordingly, issuance of shares of preferred stock could
adversely affect the voting power of holders of our common stock and could
have
the effect of deterring or delaying an attempt to obtain control of
us.

-17-

ITEM
2. DESCRIPTION
OF PROPERTY

We
lease
approximately 58,725 square feet for our headquarters at 6830 Spencer Street,
Las Vegas, Nevada 89119, which houses our corporate offices, including sales
and
engineering departments, and warehouse space. The current lease requires
payments of approximately $55,254 per month and expires in January 2007. We
have an option for an additional term of five years.

The
lease
for the Tukwila, Washington service center is for approximately 1,500 square
feet, requires monthly lease payments of $1,378 and expires in
November 2006.

In
August
2005, we leased office, manufacturing and warehouse space within Xiaolan Town
in
Zhongshan City, Guangdong Province, China to accommodate our manufacturing
requirements. The facilities consist of over 47,000 square feet. The monthly
lease payments are approximately $4,300 per month, and the lease ends in August
2008.

ITEM
3. LEGAL
PROCEEDINGS

On
July
12, 2005, we entered into a Settlement Agreement with Shuffle Master, Inc.,
with
respect to a legal proceeding filed on March 27, 2002, by Shuffle Master, Inc.,
against us in the United States District Court, District of Nevada (Case No.
CV-S-02-0438-JCM-PAL). The complaint alleged, among other things, claims for
patent infringement relating to two of Shuffle Master’s patents and requested
treble damages and an injunction enjoining us from infringing on such patents.
The Shuffle Master patents at issue were United States patent numbers 6,325,373
and 6,068,258, regarding registering use of a playing card shuffler apparatus
and the displaying of "shuffler state" information. We denied the claims and
asserted counterclaims against Shuffle Master. Shortly before trial, the parties
settled the matter. Pursuant to the Settlement Agreement, the parties agreed
to
dismiss their claims and counter-claims in the particular action and Shuffle
Master agreed not to bring any claims against us for the infringement of the
above-referenced patents for past or future use of the technology, with the
exception of matters involving infringement of the following aspects of Patent
No. 6,325,373: (i) a method of recovering from a card jam in an automatic card
shuffler, as further described in Claim 6 of Patent No. 6,325,373; and (ii)
an
automatic card shuffler with a card moving mechanism to clear card jams, as
further described in Claim 7 of Patent No. 6,325,373. In return, we paid Shuffle
Master $400,000 on July 14, 2005, and agree to pay an additional $400,000 on
or
before May 14, 2006.

On
October 5, 2004, Shuffle Master filed a separate patent infringement action
in
the United States District Court, District of Nevada (Case No.
CV-S-04-1373-JCM-LRL) claiming that the use, importation and offering for sale
of our PokerOne shuffler infringed Shuffle Master’s United States Patent No.
6,655,684. We responded by denying Shuffle Master’s claim of patent infringement
and requesting that the court enter a declaratory judgment of non-infringement.
On November 30, 2004, however, the District Court granted Shuffle Master's
motion for preliminary injunction, prohibiting us from selling our PokerOne
shuffler in the United States pending resolution of the lawsuit. On March 4,
2005, the Federal Circuit Court of Appeals issued an order staying the
injunction pending our appeal of the matter. On December 27, 2005, the Federal
Circuit held that the District Court erred in failing to properly construe
Shuffle Master's patent claims before preliminarily enjoining us and on this
basis vacated the order. As a result, we may seek to recover from Shuffle Master
any damages we suffered as a result of the wrongful injunction. With respect
to
the merits of Shuffle Master's action, a Magistrate Judge appointed by the
District Court to conduct a Markman hearing to determine the proper construction
of Shuffle Master's patent claims recommended on September 26, 2005 that the
Court adopt the claim construction urged by us. The Magistrate's recommendation
is not binding on the District Court and the District Court’s ruling on
interpretation of the claims is still pending.

ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not
applicable.

-18-

PART
II

ITEM
5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Market
Information

Our
common stock currently trades on the American Stock Exchange, or AMEX, under
the
symbol “VNX.”

The
following table sets forth the high and low closing sale price of our common
stock, as reported by the AMEX for each quarter during the past two fiscal
years, except for the first quarter during 2004 during which our shares were
traded on the OTC Bulletin Board..

2005

Low

High

Fourth
Quarter

$

2.29

$

3.70

Third
Quarter

$

1.34

$

2.25

Second
Quarter

$

1.80

$

2.15

First
Quarter

$

1.49

$

2.22

2004

Low

High

Fourth
Quarter

$

1.25

$

3.60

Third
Quarter

$

3.62

$

4.75

Second
Quarter *

$

3.45

$

4.50

First
Quarter*

$

3.50

$

4.00

*
Prices
shown in the table above for the second quarter of 2004 are high and low closing
sale prices as reported by AMEX after May 4, 2004 when our shares began trading
on the AMEX. Prior to May 4, 2004, the high and low closing bid prices of our
common stock on the OTC Bulletin Board during the second quarter of 2004 were
$4.60 and $3.67, respectively. Prices shown for the first quarter of 2004
represent the high and low closing bid prices of our common stock on the OTC
Bulletin Board.

Shareholders

As
of
March 15, 2006, we had outstanding 19,015,540shares
of
common stock, held by approximately 289 stockholders of record.

Dividend
Policy

We
have
never declared or paid cash dividends on our common stock. We presently intend
to retain earnings to finance the operation and expansion of our business and
do
not anticipate declaring cash dividends in the foreseeable future. Also, under
the private placements of the Senior Notes, so long as any purchaser
beneficially owns any of the Senior Notes, we will not, without first obtaining
the written approval of such purchasers, repurchase, redeem, or declare or
pay
any cash dividend or distribution on, any shares of our capital
stock.

Recent
Sales of Unregistered Securities

We
have
previously reported in our filings with the SEC on Forms 8-K and 10-QSB
information about unregistered sales of our securities made during the period
covered by this report pursuant to applicable exemptions from the registration
requirements of the Securities Act of 1933, as amended.

-19-

ITEM
6. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERVIEW

Our
strategy is to develop and deliver cost-effective, customer-focused, niche
products and services that increase the security, productivity and profitability
for the global gaming industry.. Our strategy involves marketing certain of
our
products for sale or lease, depending on the product, the geographic location
of
the customer and other factors. We rely on our internal sales staff and
distributor relationships for the sale and rental of our products.

RESULTS
OF OPERATIONS - YEARS ENDED DECEMBER 31, 2005 AND 2004

For
the
year ended December 31, 2005, we generated gross revenues of $3,100,738, or
10%
less than the year ended December 31, 2004. Gross revenues were offset by sales
returns and allowances of $739,263. Specific product line results for the year
ended December 31, 2005 compared to the year ended December 31, 2004 are
provided below. Sales declined as a result of the discontinuation of the
SecureDrop procduct line, disrupted sales of the PokerOne product line as a
result of a patent lawsuit, and delays in getting the RandomPlus through
jurisdictional reviews.

For
the
year ended December 31, 2005, our cost of sales was $7,754,066, or 117% more
than the year ended December 31, 2004.This
includes the impact of the inventory write down of $3,068,846. Cost of sales,
not including in the write down, for the year ended December 31, 2005, was
$4,667,220, or 31% more than the year ended December 31, 2004. The cost of
sales
increase can be attributed to the additional costs in deploying new versions
of
the PokerOne and the rollout of the RandomPlus. The manufacturing of products
in
China is expected to continue to reduce cost of sales on a per unit basis
through the first half of 2006 as we identify more efficiency and optimize
vendors in China. These efforts should result in further improvements in gross
margin.

The
gross
margin on revenue for the year ended December 31, 2005 was $(2,305,745),
excluding the impact of the inventory write down of $3,068,846, compared to
the
gross margin on revenue for the year ended December 31, 2004 of $(133,510)
a
decrease in gross margin of 1,627%.

Year
Ended December 31,

Percentage

2005

2004

change

Secure
Drop

Revenue

130,335

144,999

(10

%)

Cost
of Sales 1

10,159

219,132

(95

%)

Gross
Margin

120,177

(74,133

)

(262

%)

Shuffler
Sales

Revenue

1,311,302

1,141,321

15

%

Cost
of Sales

902,707

230,874

291

%

Gross
Margin

408,596

910,447

(55

%)

Shuffler
Rentals

Revenue

278,630

384,679

(28

%)

Cost
of Sales

467,983

277,208

69

%

Gross
Margin

(189,353

)

107,471

(276

%)

DeckChecker
Sales

Revenue

860,847

1,362,364

(37

%)

Cost
of Sales

193,088

193,170

(0

%)

Gross
Margin

667,759

1,169,194

(43

%)

DeckChecker
Rentals

Revenue

241,005

232,035

4

%

Cost
of Sales

77,476

32,325

140

%

Gross
Margin

163,529

199,710

(18

%)

Other

Revenue

(460,644

)

171,162

63

%

Cost
of Sales
2

3,015,807

2,617,361

(15

%)

Gross
Margin

(3,476,452

)

(2,446,199

)

(12

%)

1
Cost of
Sales includes manufacturing costs including labor and overhead and does not
include the $3,068,846 of inventory write down.

2
Includes
cost to service and install machines, warranty costs and miscellaneous other
costs. New shuffler installations incur a higher cost of sales during the first
year of introduction.

-20-

SecureDrop
Sales. As
a
result of our decision to discontinue new installations for this product
linethere
were no system sales generated in the year ended December 31, 2005. Our
SecureDrop sales consisted of supply items for systems already in place. The
decrease in cost of sales to $10,159 reflects the reduced sales from the prior
period.

Shuffler
Sales. The
increase in sales was due, in part, to increased sales efforts related to our
shufflers and the addition of PokerOne to the product line during the year
ended
December 31, 2005.The
increase in the cost of shufflersales
revenue was due primarily to the additional placement of shufflers during the
year ended December 31, 2005 versus the year ended December 31, 2004 and
included shuffler service costs of $1,537,967 compared to $1,184,102 in shuffler
service costs during the year ended December 31, 2004. The cost of sales
increase can be attributed to the additional costs in deploying new versions
of
the PokerOne and the rollout of the RandomPlus.

Shuffler
Rentals.
The
decrease in shuffler rental revenue reflects the reduced number of shufflers
placed on a rental basis as a result of the conversion of rental units to
purchased units in 2004 and the failure to place additional shuffler units
on a
rental basis. This failure was due, in part, to the production delays related
to
the introduction of new shuffler products, such as the RandomPlus shuffler.
Cost
of sales include shuffler rental depreciation of $467,983 during the year ended
December 31, 2005 compared to $277,208 during the prior year period. The cost
of
sales increase can be attributed to the additional costs in deploying new
versions of the PokerOne and the rollout of the RandomPlus.

Deck
Checker Rentals.
The
small increase in Deck Checker rental revenue resulted primarily from the
placement of additional units. Cost of sales included rental depreciation of
$77,476 during the year ended December 31, 2005 compared to $32,325 during
the
prior year period.

Other
Income.
The
decrease in other revenues is due to product returns offset by the sale of
products that are not produced by us and sold only on a limited basis. We also
had sales returns and allowances of $739,263 for the year ended December 31,
2005, compared to $0 during the prior year period.

Selling,
General and Administrative Expenses

For
the
year ended December 31, 2005, our general and administrative expenses were
$9,220,636 or 31% more than the year ended December 31, 2004. The increase
in
general and administrative expenses related primarily to a $1,875,000 increase
in legal and regulatory costs due to defense of the patent lawsuits and
legal/regulatory issues pertaining to former senior management, a $638,000
increase in payroll primarily related to the expensing of stock options, a
$530,000 increase in consulting expenses related to the management change in
March 2005, a $355,000 increase in depreciation related to the write off of
leasehold improvements on the old China manufacturing facility, a $133,000
increase in advisory costs, a $64,000 increase in insurance expense, a $52,000
increase in trade shows, a $28,000increase in advertising, and a $1,416,000
decrease in other expenses (including a $25,000 increase in bad debt expense,
a
decrease of $1,153,160 in non-cost of sales service related expenses, and
$92,510 increase in shipping), offset by a $52,000 decrease in travel and
entertainment, a $16,000 decrease in supplies, and a $14,500 decrease in rent
expenses.

-21-

Research
and Development Expenses

For
the
year ended December 31, 2005, research and development expenses were $1,394,000,
or 2% less than the year ended December 31, 2004.

Interest
Expense

For
the
year ended December 31, 2005, we incurred interest expenses of $1,577,996 or
69%
more than the year ended December 31, 2004. This increase was primarily
attributable to the debt service related to our previously outstanding 9% senior
secured notes, the currently outstanding 10% senior secured convertible notes
and the $5 million line of credit. The debt service on our 10% senior secured
convertible notes will continue until February and March 2008 at which time
the
principal amount is due.

FINANCIAL
CONDITION

As
of
December 31, 2005, we had a working capital deficit of $(1,637,021). We believe
that we will need an at least $12 million of additional capital, in addition
to
our existing cash and cash equivalents together with cash generated by
operations, in order to meet our working capital needs, capital expenditures,
and commitments for at the next 12 months. We will endeavor to raise additional
required funds through various financing sources, including the sale of our
equity and debt securities and the procurement of commercial debt financing.
However, as result of our present level of debt and certain restrictions on
our
ability to incur additional indebtedness under our Senior Notes, it is unlikely
we will be able to obtain additional debt-based capital, unless a significant
portion of the proceeds are used to retire existing debt. There can be no
guarantees that such funds will be available on commercially reasonable terms,
if at all. If such financing is not available on satisfactory terms, we may
be
unable to expand or continue our business as desired and operating results
may
be adversely affected.

Liquidity
and Capital Resources

As
a
result of our operating loss and our use of cash, our net working capital has
decreased from $4,511,094 at December 31, 2004 to $(1,637,022) at
December 31, 2005, as shown in the table below:

-22-

December
31,

2005

2004

Current
Assets

Cash
and cash equivalents

$

935,243

$

924,802

Current
portion of accounts receivable, trade, net of allowance for uncollectibles
of $276,420 and $125,530

1,550,559

1,596,017

Due
from affiliate

4,098

25,000

Other
receivables

113,557

121,969

Inventories

3,045,334

6,124,171

Total
current assets

5,648,791

8,791,959

Current
portion of leases payable

471,269

1,941,445

Accounts
payable

1,836,234

1,240,676

Accrued
expenses

794,203

427,199

Deferred
revenues, current portion

52,248

239,680

Short-term
debt

4,050,000

238,250

Customer
deposits

81,858

193,615

Total
current liabilities

7,285,812

4,280,865

Net
working capital

$

(1,637,021

)

$

4,511,094

Sources
of Capital

During
the years ended December 31, 2005 and 2004, our sources of capital included
a
placement of our common stock; equipment financing from a third party,
short-term notes from stockholders, convertible debentures and other private
sources of capital.

Since
2003, we have entered into lease financing agreements with Central Leasing
on a
$3,000,000 revolving facility. In 2004, we sold and leased back most of our
furniture, equipment, tooling and shufflers held for rent. In connection with
the sale and leaseback, we received sale proceeds of $723,839 and paid
$2,042,946 of lease payments for the year ended December 31, 2004 related
to 2004 and prior year leases, and received proceeds of $0 and paid $2,129,658
of lease payments for the year ended December 31, 2005, related to 2005 and
prior year leases. As of December 31, 2005, we had outstanding equipment
financing of $893,244. These equipment leases have terms of 36 to 39 months
and
were not recorded as sales because each of the leases included a mandatory
buy-back provision.

With
respect to our short-term debt, we repaid $32,493 for the year ended
December 31, 2004. As of December 31, 2005, we had outstanding
short-term loans in the aggregate amount of $4,050,000. Neither our principal
stockholder nor our directors are obligated to provide additional financing
to
us and our principal stockholder and directors are free to decline to fund
additional financings to us at any time. In such event and in the absence of
third party financing sources, we may have substantial difficulties in raising
additional financings.

In
2005,
to fund our continuing operating cash flow deficits, in addition to using the
remaining cash we had on hand at the beginning of the year, we raised additional
capital through private placements of our 10% senior secured convertible notes
in February 2005 (the “February Senior Notes”) and our 10% senior secured
convertible notes in March 2005 (the “March Senior Notes” and together with the
February Senior Notes, the “Senior Notes”).

·

On
February 15, 2005, we completed a private placement of our February
Senior
Notes, which mature on February 15, 2008. The February Senior Notes
are
secured by a first priority security interest in our assets. The
February
Senior Notes require semi-annual payments of interest only on August
1 and
February 1 of each year, with the principal and any unpaid interest
due at
February 15, 2008. Any prepayments of the February Senior Notes
made prior
to February 2007 require the payments of premiums that decline
each year.
Holders of the February Senior Notes have a one-time right to convert
up
to 50% of the then outstanding principal of the February Senior
Notes into
shares of our common stock, $.001 par value, at a rate $1.65 per
share.
Through the private placement we issued an aggregate of $10,000,000
in
February Senior Notes, in return for exchanged notes in the aggregate
principal amount of $3,250,000 and gross cash proceeds of
$6,750,000.

-23-

·

On
March 14, 2005, we completed an additional $2 million private placement
of
our March Senior Notes, which mature on March 14, 2008. The March
Senior
Notes were issued on a pari
passu
basis with the February Senior Notes and, as a result, are secured
by a
first priority security interest in our assets. The March Senior
Notes
require semi-annual payments of interest only on September 1 and
March 1
of each year, with the principal and any unpaid interest due at
March 15,
2008. Any prepayments of the March Senior Notes made prior to March
2007
require the payments of premiums that decline each year. Holders
of the
March Senior Notes have a one-time right to convert up to 50% of
the then
outstanding principal of the March Senior Notes into shares of
our common
stock, $.001 par value, at a conversion price of $1.65 per
share.

·

On
October 6, 2005, we negotiated a one year revolving credit facility
in the
amount of $5,000,000 and carrying an interest rate of 9.0%. As
of December
31, 2005, we had borrowed $4,000,000 under the credit
line.

To
fund
our continuing operating cash flow deficits, on
March
29, 2006, we entered into an agreement to issue and sell our secured promissory
notes for aggregate gross proceeds of $7 million. These notes will bear interest
at an annual rate of 7% and mature on March 31, 2011. We expect to issue these
notes and receive the net offering proceeds in early April 2006. In connection
with this debt financing, we also entered into a definitive agreement with
the
purchasers of our notes whereby we may, at our sole option, require them to
purchase up to $5 million of our common stock. This agreement, sometimes
referred to as equity line of credit, has a term of five years and grants us
a
binding “put” right to sell our shares at a 20% discount to the volume weighted
average price of our shares on the day of a drawdown, subject to a ceiling
price
of $3.50 per share. In addition, we have reached an agreement in principal
to
issue and sell an additional $6 million of our common stock at price of $2.50
per share for a total of 2.4 million shares.

The
financings described in the preceding paragraph are conditioned upon the
concurrent pay off or conversion into common stock of all of our outstanding
senior secured convertible promissory notes. As of the date of this report,
we
had approximately $11.6 million principal amount of senior secured convertible
promissory notes outstanding. Of this amount, the holders of these notes are
expected to convert approximately $5.6 million in principal and interest into
shares of our common stock and we expect to pay off the remaining $6.0 million
outstanding balance with a portion of the proceeds from the financings described
above.

In
addition to retiring our preexisting notes, we expect to use approximately
$5
million of the proceeds from the financings described above to pay down our
existing line of credit. The balance of $7 million of proceeds would be
available to us for general working capital purposes. We believe that we will
have sufficient funds to meet our working capital needs for the next 12 months.

Net
Cash Used In Investing Activities.

The
net
cash used in investing activities reported for the year ended December 31,
2005
consisted primarily of $1,333,875 from the acquisition of plant and equipment.

Net
Cash Provided By Financing Activities.

Net
cash
provided by financing activities reported for the year ended December 31, 2005
consisted of $12,000,000 provided by the issuance of 10% senior secured
convertible notes (offset by the repayment of $3,250,000 of the 9% notes),
proceeds from the sale of stock of $3,567,000, offset by the repayment of
equipment leases of $1,743,100, and acquisition of treasury stock of $846,820;
and the one
year
revolving credit facility in the amount of $5,000,000 which we drew down to
$4,000,000

-24-

Contractual
Cash Obligations and Off Balance Sheet Arrangements .

Our
contractual cash obligations under our debt agreements, capital leases and
operating leases for the next five years are as follows:

Following
is a summary of what our management believes are the critical accounting
policies related to our operations. The application of these policies, in some
cases, requires management to make subjective judgments and estimates regarding
the effect of matters that are inherently uncertain. See Note 1,
“Description of Business and Significant Accounting Policies,” to financial
statements included in this annual report for a more detailed discussion of
our
accounting policies. Except as described below, we do not employ any critical
accounting policies selected from among available alternatives or that require
the exercise of significant management judgment to apply, and we believe none
of
our estimates are so highly uncertain or susceptible to change as to present
a
significant risk of a material impact on our financial condition or operating
performance.

Allowance
for Doubtful Accounts.

In
connection with the preparation of our financial statements, management reviews
and evaluates the collectability of our trade receivables and adjusts our
allowance for estimated uncollectible accounts as deemed necessary in the
circumstances. These estimates have the potential for critically affecting
the
determination of results of operations for any given period. Factors considered
by management in making such estimates and adjustments include any
concentrations among customers, changes in our relationships therewith, payment
history and the apparent financial condition thereof.

Revenue
Recognition.

We
recognize revenue from the sale of our shuffler and Deck Checker™ products upon
shipment against valid customer contracts or purchase orders. Sales are
recognized immediately when shufflers that are rented are converted to purchases
depending on the creditworthiness and payment history of the casino company
since payment terms are from 20 to 48 months. We recognize revenue from our
sales to independent distributors at the time that the distributor takes
possession of our product and title transfers to the buyer. The extended
warranty and maintenance components that are part of long term sales contracts
are unbundled and recognized as deferred revenue amortized over the remaining
life of the sales agreement after the initial 90−day warranty as required by the
Emerging Issues Task Force Issue No. 00−21, Revenue
Arrangements with Multiple Deliverables.
The
useful life of our shufflers and Deck Checkers™ is five years with proper
maintenance; the life can be extended with the replacement of component parts.
If the customer does not possess the required creditworthiness or an established
payment history with us, we would then book the revenue as an installment sale
and recognize it over time as payments are received. Revenue from shuffler
rentals is recorded at the first of each month in accordance with rental
contract terms. All rental contracts are cancelable upon 30−day written notice
by the customer. Maintenance expense for rental units is recorded in the period
it is incurred. Although sales are made with a right to return, returns are
subject to a claim of unacceptable performance. Sales returns and allowances
are
recorded after returned goods are received and inspected. We provide currently
for estimated warranty repair costs associated with sales contracts. Although
there are no extended warranties offered for our products, we do provide for
maintenance contracts that are billed and recognized on a monthly
basis.

-25-

Intangible
Assets.

We
amortize our intangible assets (patent and technology rights) on a straight-line
basis over currently estimated useful lives of 10 years. Based on its assessment
of the potential for product obsolescence and other impairment factors, we
believe that the useful life of our patents and technology rights equals the
full term of the patent.

Legal
defense costs

We
do not
accrue for future litigation defense costs, if any, to be incurred by us in
connection with outstanding litigation and other disputed matters but, instead,
record such costs as the related legal and other services are
rendered.

Recent
Accounting Pronouncements

In
December, 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement
of Financial Accounting Standards
(“SFAS”)
No. 123 (Revised 2004), Share
Based Payment
(“SFAS
123R”). SFAS 123R requires certain changes in the way compensation cost related
to share based employee compensation transactions is recognized in the financial
statements as compared to SFAS No. 123, Accounting
for Stock-Based Compensation.
The
provisions of SFAS 123R are effective for us as of January 1, 2006.

In
May
2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a Replacement ofAPB
Opinion No. 20 and SFAS No. 3.
SFAS
No. 154
replaces
APB Opinion No. 20, AccountingChanges
and SFAS
No 3, Reporting
Accounting Changes in Interim Financial Statements
and
changes the requirement for the accounting for and reporting of a change in
accounting principles. SFAS No. 154 applies to all voluntary changes in
accounting principles. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. The provisions
of
SFAS No. 154 will be effective for accounting changes made in fiscal year
beginning after December 15, 2005. We
have
no present expectation to make any accounting changes in the foreseeable future
that would be subject to SFAS No. 154.

ITEM
7.
FINANCIAL
STATEMENTS

Our
financial statements and related notes are contained on pages F-1 to F-15
of this report.

ITEM
8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

ITEM
8A. CONTROLS
AND PROCEDURES

(a)Evaluation
of Disclosure Controls.
Our
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of our
2005 fiscal year. Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, as appropriate to allow timely
decisions regarding required disclosure. Based on their evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of December 31, 2005.

-26-

(b)Changes
in internal control over financial reporting.
Since
joining VendingData in the fourth quarter of 2005, our current financial
management team has and is continuing to implement improvements to our internal
controls and procedures to address weaknesses and deficiencies identified by
current senior management. Specifically, we have modified, or are in the process
improving, our procedures for reconciling intercompany accounts, posting
accounts receivable in our accounting system, communicating between sales and
accounting personnel, reviewing journal entries, authorizing purchase orders
and
integrating our financial reporting databases. On March 27, 2006, our
independent registered public accounting firm notified our Audit Committee
that,
during the course of performing its audit of our 2005 financial statements,
it
had identified one material weakness concerning the proper dating of payments
received, which affects the aging of accounts receivable, and a significant
deficiency regarding our internal controls over our financial reporting
concerning the reconciliation of the separate databases used by us in our
financial reporting and inventory tracking. The material weakness and
significant deficiency related to processes in place when our current financial
management joined our company in the fourth quarter of 2005. We have already
addressed and resolved the material weakness concerning the proper dating of
payments received. We are in the process of addressing and resolving the
significant deficiency concerning the reconciliation of the separate databases
and expect that it will be corrected by the end of the second quarter of 2006.

While
we
are in the process of taking the foregoing steps and developing and implementing
a formal set of internal controls and procedures for financial reporting as
required by the Sarbanes-Oxley Act of 2002, the efficacy of the steps we have
taken to date and steps we are still in the process of completing is subject
to
continued management review supported by confirmation and testing by management
and by our auditors. As a result, we anticipate that additional changes
will be made to our internal controls and procedures. Other than the
foregoing initiatives, no change in our internal control over financial
reporting occurred during the fiscal year ended December 31, 2005 that has
materially affected, or is reasonably likely to affect, our internal control
over financial reporting.

It
should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of
the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Because of
these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.

ITEM
8B. OTHER INFORMATION

Not
applicable.

-27-

PART
III

ITEM
9.DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A)
OF THE EXCHANGE ACT

The
following information is furnished with respect to each member of our board
of
directors, including our principal executive officer who is also a director.
Each member of our board of directors serves a one year term until his successor
is duly elected and appointed at our next annual meeting of stockholders. There
are no family relationships between or among any of our directors.

Executive
Officers and Directors

Name

Age

Position

Mark
R. Newburg

51

President
and CEO

Arnaldo
F. Galassi

49

Vice
President and Chief Financial Officer

Peter
Zee

59

Vice
President of Engineering and Manufacturing

Simon
Herbert

42

Vice
President of Sales

James
E. Crabbe

60

Chairman
of the Board of Directors

Ronald
O. Keil

73

Director

Bob
L. Smith

68

Vice-Chairman
of the Board of Directors

Maj.
Gen. Paul A. Harvey

68

Director

Vincent
L. DiVito

46

Director

Robert
L. Miodonski

55

Director

Mark
R. Newburg joined
our board of directors as Executive Director in March 2005, was appointed
Treasurer in April, 2005, and was named President and CEO in October 2005.
Mr.
Newburg previously served as the president and chief executive officer and
as a
member of the board of directors of VirtGame Corp. since August 2004. From
March
2004 to November 2004, Mr. Newburg served as chief operating officer to
Left Right Marketing Technologies, an internet retailing start-up in Las Vegas.
From March 2003 to March 2004, Mr. Newburg was president and chief executive
officer of C2Consulting Inc., a firm specializing in areas such as strategic
planning, change management, organizational integration, international
operations, and organizational alignment. From July 2001 to March 2003, Mr.
Newburg served as president of Aristocrat Technologies Inc, an Australia based
designer, builder and marketer of proprietary software and hardware to the
international gaming market. Previously, Mr. Newburg had a 20 year career
at NCR, a $5.9 billion provider of store automation, self-service, payment,
and
data-warehousing solution. Mr. Newburg earned his MBA from the University of
Dayton in June 1985, and dual undergraduate majors with a BS in both Accounting
& Business Administration from the University of Findlay in June
1976.

Arnaldo
F. Galassi is
our
Vice President and Chief Financial Officer. Mr. Galassi started working as
a
consultant with VendingData in March 2005 and joined the company as an employee
in October 2005. Mr. Galassi has over 20 years of high level international
finance and corporate treasury experience. He joined AT&T in 1983 and rose
to treasury director for Asia Pacific located in Hong Kong. In 1996 he joined
Lucent Technologies and established its treasury operations in Asia Pacific
region. He then joined NCR Corporation and was promoted to NCR's director of
corporate finance after spending the previous five years living and working
in
Singapore managing NCR's Finance and Treasury Center (Singapore) and NCR's
treasury operations in Amsterdam and London. Most recently, Mr. Galassi was
the
CFO of VirtGame Corp.

Peter
Zeeis
our
Vice President of Engineering and Manufacturing. Mr. Zee started working as
a
consultant with VendingData in March 2005 and joined the company as an employee
in October 2005. Mr. Zee has extensive international manufacturing, engineering,
sales management, marketing, strategy and planning experience with NCR. Mr.
Zee
is credited with negotiating the 1997 manufacturing joint venture for NCR with
the Chinese government and built and operated NCR’s Greater China organization
that achieved tremendous growth in sales and manufacturing volume. Mr. Zee
retired from NCR in 2004 after 34 years of service. After retirement, Mr. Zee
joined Tech Elite Group as its CEO. Mr. Zee started working as a consultant
with
VendingData in March 2005 and joined the company as an employee in October
2005.

-28-

Simon
Herbertis
our
Vice President of Sales and oversees international distribution partnerships.
Mr. Herbert started working for VendingData in July 2005. Mr. Herbert is a
25
year senior gaming industry executive who is credited with building several
multi-million dollar operations. Most notably, Mr. Herbert served as CEO of
TCS
Group. During his 8-year tenure with TCS, Mr. Herbert consolidated operations
and forged a number of strategic relationships thereby creating one of the
largest private global gaming supply companies. Subsequently, over a 9-month
period, Mr. Herbert established VIP Gaming Solutions where he was instrumental
in creating a new global gaming supply company with 4 offices. Mr. Herbert
has
also served as director of Business Development for Bell Fruit Services,
Regional Director of MAM Leisure Ltd. and Divisional Director of Brent Walker
Leisure.

James
E. Crabbe became
a
member and Vice-Chairman of our board in May 2000 and was elected Chairman
of
our board in August 2001. Mr. Crabbe is currently engaged in the active
management of his personal investment portfolio. He spent 34 years in the money
management business. In 1980, he co-founded the Crabbe-Huson Group, Inc., an
investment management company, of which he served as president, portfolio
manager and analyst until his retirement in 2000. Mr. Crabbe earned his
bachelor’s degree from the University of Oregon in 1967. He also serves on the
board of directors of Viewpoint Corporation, a publicly traded software
company.

Ronald
O. Keil has
been
a member of our board since April 1999 and is a member of our Audit Committee.
Since March 1995, Mr. Keil has served as Managing Partner of RJL
Properties, Inc., which owned and operated four hotels and a mini-storage
facility all of which were sold between 1995 and 1997. In addition, from October
1993 to January 1998, Mr. Keil owned a 142-room Holiday Inn in Idaho Falls
and since 1999 has owned and operated Keil’s, Inc., a chain of supermarkets in
California. Mr. Keil is a founder and director of the Bank of Clark County,
Oregon. He earned a bachelor’s degree in Business Administration from Lewis and
Clark College and has completed graduate work towards a Master of Business
Administration from the University of Oregon.

Bob
L. Smith joined
our board in May 1998 and served as Chairman of our board from April 1999 until
August 2001, when he became Vice-Chairman of our board and is also a member
of
our Audit Committee. Mr. Smith also serves as Chairman and Chief Executive
Officer of VIP’s Industries, Inc., a company co-founded by Mr. Smith in
1968 that oversees restaurant, hotel and real estate development in five Western
states. Mr. Smith serves on the Boards of Directors of Flying J., Inc., an
integrated oil company, and Regency of Oregon (formerly Blue Cross and Blue
Shield of Oregon), and previously served on the Boards of Directors of the
Crabbe-Huson Funds, Inc., an investment management company, and Centennial
Bank
(now Umpqua Bank). Mr. Smith received a bachelor’s degree in Business
Administration from the University of Oregon in 1962.

Major
General Paul A. Harvey
joined
our board in October 2005 and he chairs our Compliance Committee.
General Harvey spent 32 years on active duty in the United States Air Force
where he held numerous command positions throughout the United States, Europe,
Africa and the Middle East. Following retirement, he was the Executive Director
of the Mississippi Gaming Commission from 1993 through 1998. General Harvey
serves on the Board of Directors of the National Center for Responsible Gaming
and as an Outside Director on the Board of Riviera Holdings Company, Inc.,
Las
Vegas, NV, and as an Outside Director on the Board of Progressive Gaming
International Corp, Las Vegas, NV. General Harvey was previously Chairman of
the
Board of VirtGame Corp.

Vincent
L. DiVitojoined
our board in October 2005 and he chairs our Audit Committee. Mr. DiVito is
Vice
President, Chief Financial Officer and Treasurer of Lonza, a Swiss-based life
sciences chemical company headquartered in Allendale, New Jersey. Previously,
Mr. DiVito was the Vice President and Chief Financial Officer of Algroup
Wheaton, a global pharmaceutical and cosmetics packaging company. Mr. DiVito
spent two years on the audit team of Ernst & Whinney (now Ernst &
Young). Mr. DiVito is a certified public accountant and certified management
accountant. He is a member of the Board of Directors of the Riviera Hotel in
Las
Vegas, NV and was a member of the Board of Directors of VirtGame Corporation.

-29-

Robert
L. Miodunskijoined
our board in October 2005 and he is a member of our Compliance Committee and
the
Audit Committee. Previously, Mr. Miodunski was president and CEO of Alliance
Gaming Corporation from 1999 through 2004. During his tenure he dramatically
increased the value of the Company, positioning it as the number two player
in
the gaming supply industry and one of only two providers of games, systems,
and
wide area progressives in both Class I and II markets. Through a series of
global acquisitions and divestitures, Mr. Miodunski restructured and transformed
Alliance Gaming from a gaming conglomerate into a technology provider,
successfully increased the company’s market capitalization from $15 million to a
high of $1.7 billion, and achieved NYSE listing for the company in 2003. From
1994 until 2002, Mr. Miodunski served as president of United Coin Machine
Company (UCMC), a subsidiary of Alliance Gaming, operating 7300 gaming devices
in 600 locations throughout Nevada. During his tenure, UCMC increased revenues
by 76 percent and EBITDA by 66 percent, achieving top operator position with
50
percent more games under contract than the next largest competitor. Mr.
Miodunski continues to consult to Alliance Gaming’s Board of Directors and CEO
through 2008.

Board
of Directors and Committees of the Board

Our
business affairs are conducted under the direction of our board of directors.
The role of our board of directors is to effectively govern our affairs for
the
benefit of our stockholders and, to the extent appropriate under governing
law,
of other constituencies, which include our employees, customers, suppliers
and
creditors. Our board strives to ensure the success and continuity of our
business through the selection of a qualified management team. It is also
responsible for ensuring that our activities are conducted in a responsible
ethical manner. Our board of directors has three standing committees, an audit
committee and a nominating committee and has recently formed a compensation
committee that will replace the executive committee.

Our
board
of directors met 11 times in 2005. All of the incumbent directors attended
the
meetings during the period for which they have been a director and the meetings
held by committees of the board of directors on which they serve, except Bob
Smith who missed the September 21, 2005, Board of Directors meeting

Audit
Committee.
The
audit
committee is comprised of Messrs. DiVito, Keil, Smith, and Miodonski.
Mr. DiVito serves as the audit committee chair. Our audit committee
generally meets quarterly, and in 2005, our audit committee held two meetings.
As stated in the audit committee charter, our audit committee has the
responsibility of selecting the firm that will serve as our independent public
accountants, approving and reviewing the scope and results of the audit and
any
non-audit services provided by the independent public accountants and meeting
with our financial staff to review internal control, procedures and
policies.

We
have
identified Mr DiVito as the audit committee financial expert. Mr DiVito is
the
CFO of Lonza, a Swiss life sciences chemical company, and he is also a certified
public accountant and a certified management accountant.

The
members of our audit committee are independent, as independence for audit
committee members is defined in Section 121A of the American Stock Exchange
Company Guide. In addition, Messrs Keil, Smith and Miodonski meet the
definition of “financially sophisticated” as defined in Section 121B of the
American Stock Exchange Company Guide.

-30-

Compliance
Committee.
The
compliance committee is comprised of Messrs. Harvey, Miodonski, and
Newburg. Mr. Harvey serves as the compliance committee chair. Formed in
late 2005, the compliance committee will meet quarterly. As stated in the
compliance plan, our compliance committee has the responsibility of identifying
and evaluating situations or material events that may impact public faith or
the
reputation and integrity of the Company within the gaming industry.

Nominating
Committee.In
January 2004, our board of directors created a nominating committee and
appointed Messrs. Keil and Smith to serve on the nominating committee.
Mr. Smith serves as the nominating committee chair. The nominating
committee is responsible for assisting our board of directors with respect
to
the appropriate size and composition of our board and monitoring and making
recommendations regarding the performance of our board. In this regard, our
nominating committee evaluates the qualifications of all proposed candidates
for
election to our board of directors, including capability, availability to serve,
conflicts of interest and other relevant factors.

In
2005,
our nominating committee held one meeting. The members of our nominating
committee are independent, as independence for directors is defined in Section
121A of the American Stock Exchange Company Guide.

Section
16(a) Beneficial Ownership Reporting Compliance

Rules
adopted by the SEC under Section 16(a) of the Securities Exchange Act of 1934,
or the Exchange Act, require our officers and directors, and persons who own
more than 10% of the issued and outstanding shares of our equity securities,
to
file reports of their ownership, and changes in ownership, of such securities
with the Securities and Exchange Commission on Forms 3, 4 or 5, as appropriate.
Such persons are required by the regulations of the Securities and Exchange
Commission to furnish us with copies of all forms they file pursuant to
Section 16(a).

Based
solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to
us
during our most recent fiscal year, and any written representations provided
to
us, we believe that all of the officers, directors, and owners of more than
ten
percent of the outstanding shares of our common stock complied with Section
16(a) of the Exchange Act for the year ended December 31, 2005.

Code
of Ethics

We
have
adopted a Code of Ethics that applies to our board of directors, chief executive
officer, chief financial officer, controller and any other individual serving
in
similar capacities. The Code of Ethics is designed to serve as the foundation
of
our standards of behavior and to promote honest and ethical conduct, proper
disclosure of financial information in our periodic reports, and compliance
with
applicable laws, rules, and regulations by our directors and senior officers
who
have operating and financial responsibilities. On April 28, 2005, our board
amended and restated our Code of Ethics so that it now applies to all directors,
officers and employees. Our Code of Ethics is posted on the “Investors” section
of our Internet web site athttp://www.vendingdata.com/investors/ethics.

ITEM
10. EXECUTIVE
COMPENSATION

Summary
Compensation Table

The
following table sets forth the compensation awarded to, earned by or paid to,
our chief executive officer and our other executive officers earning in excess
of $100,000 for services rendered in all capacities during fiscal years ended
December 31, 2005, 2004 and 2003. We provide certain perquisites and other
personal benefits to some or all of our executives. The unreimbursed incremental
cost to us of providing perquisites and other personal benefits did not exceed,
as to any of the executives for any year, the lesser of $50,000 or 10% of the
total salary and bonus paid to such executive for such year.

-31-

Annual
Compensation

Long
-Term Compensation

Name
and Principal Position

Year

Salary

($)

Bonus

($)

Securities
Underlying Options/SARs (#)

All
Other

Compensation
($)

Mark
R. Newburg

2005

64,423

75,000

—

150,000

President
and CEO

2004

—

—

—

—

2003

—

—

—

—

Steven
J. Blad

2005

106,022

—

—

116,667

Former
President and CEO

2004

340,400

—

—

—

2003

282,000

7,800

500,000

—

On
March
25, 2005, Mr. Blad resigned as our Chief Executive Officer, President and as
a
member of our board of directors. Mr. Newburg was appointed to our board of
directors as Executive Director in March 2005 and was named President and Chief
Executive Officer in October 2005.

Option
Grants In Last Fiscal Year

The
following table summarizes option grants during the fiscal year ended December
31, 2005 to each of the executive officers named in the Summary Compensation
Table above.

Individual
Grants

Number
of Securities Underlying Options

Percent
of Total Options Granted to Employees in

Exercise
or

Base
Price

Expiration

Name

Granted
(#)

Fiscal
Year

($/Sh)

Date

Mark
R. Newburg,

President
and CEO

300,000

8.1%

$1.49

1/31/2015

200,000

5.4%

$1.85

(1)

750,000

20.4%

$1.34

(2)

Steven
J. Blad

Former
President and CEO

—

—

—

—

(1)This
option expires with respect to one-third of the 200,000 shares on each of April
28, 2008, April 28, 2009 April 28, 2010.

(2)This
option vests only upon a change in control and expires 10 years following such
change in control.

Aggregated
Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR Values

The
following table sets forth information regarding exercises of stock options
and
stock appreciation rights, or SARs, during the fiscal year ended
December 31, 2005 made to the named executive officers.

Name

Shares

Acquired
on

Exercise
(#)

Value

Realized
($)

Number
of Securities

Underlying
Unexercised

Options/SARs
as of

December
31, 2005 (#)

Value
of Unexercised

In-the-Money
Options as of

December
31, 2005 ($)

Exercisable

Unexercisable

Exercisable

Unexercisable

Steven
J. Blad

—

—

0

0

0

$
0

Mark
R. Newburg

—

—

0

1,250,000
(1)

0

$
1,822,000

1
750,000
of which are contingent upon a change of control of the Company.

-32-

Compensation
of Directors

Our
non-employee members of our board of directors receive an initial grant of
1,000
options and an annual grant of 10,000 options on the date of the annual or
special meeting of stockholders at which directors are elected. The exercise
price shall be the then-current market price of our common stock. Our directors
are reimbursed for their out-of-pocket expenses related to their services as
directors or meeting attendance. Members of our board of directors that are
employees do not receive compensation for their services as directors. In
addition, upon joining the board, Directors DiVito, Harvey and Miodonski each
received options to purchase 100,000 shares of common stock at $1.34 per share
over a 3-year term pursuant to the Company's 1999 Stock Option and Grant Plan;
and subject to shareholder approval, each will receive a grant of 50,000 shares
of common stock to be accrued in increments of 10,000 shares over the next
5
quarters and issued upon receipt of shareholder approval.

Employment
Agreements

On
March
25, 2005, we entered into a resignation agreement with Steven J. Blad in which
we permitted Mr. Blad to resign as our Chief Executive Officer, President and
as
a member of our board of directors. In addition to the resignation agreement,
we
entered into a six-month consulting agreement with Mr. Blad for the purposes
of,
among other things, transitioning the administration of our manufacturing
facilities in China and assisting with certain international sales matters.
The
consulting agreement provided for six equal payments of $16,666.66 and
additional payments of up to $100,000 upon the satisfaction of certain
milestones related to our manufacturing facilities in China. The consulting
agreement also provided for a commission of up to 2.5% of the revenue received
from sales by Technical Casino Supplies Ltd., an affiliate of TCSJohnHuxley,
pursuant to the Distribution Agreement dated January 21, 2005. The consulting
agreement was terminated in advance of the six-month term in July
2005.

On
February 4, 2005, we entered into a consulting agreement with Mark Newburg
through which Mr. Newburg provided us with detailed independent analysis of
our
operational matters. Pursuant to the consulting agreement, we agreed to provide
an initial payment of $20,000, provide monthly compensation of $10,000 beginning
on March 1, 2005, $20,000 monthly effective April 1, 2005, and issued
options to purchase 300,000 shares of common stock at an exercise price of
$1.49
per share. Although Mr. Newburg was appointed to our board of directors as
Executive Director on March 25, 2005 to oversee all aspects of our operations,
Mr. Newburg continued to be compensated pursuant to the terms of this consulting
agreement until he entered into a formal employment agreement in September
2005. On April 28, 2005, our Board of Directors, without Mr. Newburg
participating, granted to Mr. Newburg an additional option to purchase 200,000
shares of our common stock at an exercise price of $1.85 per share.On
September 29, 2005 we entered into a two year employment agreement with Mr
Newburg. Terms of the agreement provide for an annual salary of $250,000, a
signing bonus of $75,000 split in two equal payments to be made on the signing
of the employment agreement and on December 15, 2005, and 750,000 stock options
priced at $1.34 to be issued on any change of control. Mr Newburg is also
eligible for annual bonuses of up to 50% of his salary provided certain
performance milestones are met.

On
March
1, 2005, we entered into a consulting agreement with Arnaldo F. Galassi through
which Mr. Galassi
provided
us with financial analysis of our operational matters. Pursuant to the
consulting agreement, we agreed to provide monthly compensation of $5,000
beginning on March 1, 2005 and issued options to purchase 100,000 shares of
common stock at an exercise price of $1.92 per share. On September 29, 2005
we entered into a two year employment agreement with Mr. Galassi to be the
Company’s vice president and chief financial officer. Terms of the agreement
provide for an annual salary of $150,000, and 150,000 stock options priced
at
$1.34 to be issued on any change of control. Mr. Galassi is also eligible for
an
annual bonus of up to 50% of his salary provided certain performance milestones
are met.

The
table
below sets forth the beneficial ownership of our common stock, as of March_30,
2006, by:

·

All
of our directors and executive officers,
individually;

·

All
of our directors and executive officers, as a group; and

·

All
persons who beneficially owned more than 5% of our outstanding
common
stock.

The
beneficial ownership of each person was calculated based on 17,035,216 shares
of
our common stock outstanding as of December 31, 2005, according to the record
ownership listings as of that date and the verifications we solicited and
received from each director and executive officer. The SEC has defined
“beneficial ownership” to mean more than ownership in the usual sense. For
example, a person has beneficial ownership of a share not only if he owns it
in
the usual sense, but also if he has the power to vote, sell or otherwise dispose
of the share. Beneficial ownership also includes the number of shares that
a
person has the right to acquire within 60 days of December 31, 2005 pursuant
to
the exercise of options or warrants or the conversion of notes, debentures
or
other indebtedness, but excludes stock appreciation rights. Two or more persons
might count as beneficial owners of the same share. Unless otherwise noted,
the
address of the following persons listed below is c/o VendingData Corporation,
6830 Spencer Street, Las Vegas, Nevada 89119.

Name
of Director or Executive Officer

Shares1

Percentage

James
E. Crabbe

7,105,073

2

41.71

%

Bob
L. Smith

545,962

3

3.20

%

Ronald
O. Keil

253,654

4

1.49

%

Paul
A. Harvey

0

—

Vincent
L. DiVito

0

—

Robert
L. Miodonski

0

—

Mark
R. Newburg

108,333

5

0.64

%

Arnaldo
F. Galassi

35,000

6

0.21

%

Peter
Zee

34,000

5

0.21

%

Simon
Herbert

0

—

All
directors and executive officers as a group
(10 persons)

8,048,022

7

47.24

%

Name
and Address of 5% Holder

Leonid
Frenkel

c/o
Triage Capital LF Group, LLC

401
City Avenue, Suite 800

Bala
Cynwyd, Pennsylvania 19004

3,736,186

8

21.93

%

LC
Capital Master Fund LP

c/o
Lampe Conway & Co., LLC

680
5th Avenue, Suite 1201

New
York, NY 10019

3,057,169

9

17.95

%

*Denotes
less than 1%.

-34-

1

Unless
otherwise noted, the persons identified in this table have sole voting
and
sole investment power with regard to the shares beneficially owned
by
them.

2

Includes
4,574,066 shares held directly by Mr. Crabbe, 70,600 shares issuable
upon the exercise of stock options and 2,460,407 shares held by Mr.
Crabbe, as Trustee of the James E. Crabbe Revocable Trust. Mr. Crabbe
disclaims any ownership of any shares of common stock beneficially
owned
by Phileo Foundation, a charitable foundation of which Mr. Crabbe
is a
trustee and president, or by Yvonne M. Huson, or her related trusts,
for which Mr. Crabbe formerly held voting
power.

3

Includes
164,012 shares held directly by Mr. Smith, 232,162 shares held by
VIP’s Industries, Inc., 67,288 shares held by I.C.D. and 82,000 shares
issuable upon the exercise of stock
options.

4

Includes
182,654 shares held directly by Mr. Keil, 71,000 shares issuable upon
the exercise of stock options.

5

Includes
108,333 shares issuable upon the exercise of stock
options.

6

Includes
1,000 shares held directly by Mr. Galassi and 34,000 shares issuable
upon
the exercise of stock options.

Based
on a Form 3 filed on February 8, 2006 and information provided, includes
shares beneficially owned by Triage Offshore Fund, Ltd. issuable
upon the
conversion of notes into 1,061,363 shares and the exercise of warrants
into 697,021 shares; shares beneficially owned by Triage Capital
Management B LP issuable upon the conversion of notes into 128,029
shares
and the exercise of warrants into 964,688 shares; shares beneficially
owned by Triage Capital Management LP issuable upon the conversion
of
notes into 98,484 shares and the exercise of warrants into 700,844
shares;
and shares beneficially owned by Periscope Partners LP issuable upon
the
conversion of notes into 75,757 shares and the exercise of warrants
into
10,000 shares.

9

Based
on information provided, includes 212,321 shares issued directly,
1,860,000 shares issuable upon the exercise of warrants and 984,848
shares
issuable upon the conversion of convertible
notes.

Equity
Compensation Plan Information

We
have
two stock options plans, the Amended and Restated 1999 Stock Option Plan and
the
Amended and Restated 1999 Directors’ Stock Option Plan, through which 5,000,000
shares and 300,000 shares are authorized, respectively. Pursuant to our stock
options plans, as of December 31, 2005, there were options outstanding to
purchase 4,116,972 shares of our common stock with a weighted average exercise
price per share of $2.12 and options remaining to purchase 1,183,028 shares
of
our common stock.

The
following table sets forth certain information as of December 31, 2005
about our equity compensation plans under which our equity securities are
authorized for issuance.

(a)

(b)

(c)

Plan
Category

Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights

Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))

Equity
compensation plans

approved
by security holders

12,936,995

$1.85

1,183,028

Equity
compensation plans not

approved
by security holders

—

—

—

Total

12,936,995

$1.85

1,183,028

The
first
column reflects outstanding stock options to purchase 3,751,772 shares and
365,200 shares of common stock pursuant to our Amended and Restated 1999 Stock
Option Plan and our Amended and Restated 1999 Directors’ Stock Option Plan,
respectively, which have been approved by our stockholders.

The
third
column reflects 1,248,228 shares remaining for issuance under our Amended and
Restated 1999 Stock Option Plan and a deficit of 65,200 shares available under
our Amended and Restated 1999 Directors’ Stock Option Plan.

-35-

ITEM
12.CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

Transaction
Review

We
have
adopted a policy that any transactions with directors, officers or entities
of
which they are also officers or directors or in which they have a financial
interest, will only be on terms consistent with industry standards and approved
by a majority of the disinterested directors of our board. Our bylaws provide
that no such transactions by us shall be either void or voidable solely because
of such relationship or interest of directors or officers or solely because
such
directors are present at the meeting of our board or a committee thereof which
approves such transactions, or solely because their votes are counted for such
purpose if:

·

The
fact of such common directorship or financial interest is disclosed
or
known by our board or committee and noted in the minutes, and
our board or
committee authorizes, approves or ratifies the contract or transaction
in
good faith by a vote for that purpose without counting the vote
or votes
of such interested directors;
or

·

The
fact of such common directorship or financial interest is disclosed
to or
known by the stockholders entitled to vote, and they approve or
ratify the
contract or transaction in good faith by a majority vote or written
consent of stockholders holding a majority of the shares of common
stock
entitled to vote (the votes of the interested directors or officers
shall
be counted in any such vote of stockholders); or

·

The
contract or transaction is fair and reasonable to us at the time
it is
authorized or approved.

In
addition, interested directors may be counted in determining the presence of
a
quorum at a meeting of our board or a committee thereof that approves such
transactions. If there are no disinterested directors, we shall obtain a
majority vote of the stockholders approving the transaction.

Private
Placement

Through
our private placement of 10% senior secured convertible notes in February 2005
and March 2005 in the aggregate principal amount of $12,000,000, we received
subscriptions from and issued notes to LC Capital Master Fund LP and affiliates
of Leonid Frenkel. Each note provides for the one-time right to convert up
to
one-half of the outstanding principal owed on the note into shares of common
stock at a rate of $1.65 per share. The following table identifies the notes
issued to LC Capital Master Fund LP and affiliates of Leonid Frenkel and the
maximum number of shares issuable under such notes.

Name

Amount
of

Note
($)

Conversion

Shares

(Maximum)

LC
Capital Master Fund LP

1,500,000

454,545

LC
Capital Master Fund LP

1,750,000

530,303

Triage
Capital Management B, LP

422,500

128,029

Triage
Capital Management LP

325,000

98,484

Triage
Offshore Fund Ltd

3,502,500

1,061,363

Periscope
Partners LP

250,000

75,757

The
rights and obligations of the subscribers of our 10% senior secured convertible
notes in February 2005 and March 2005 are governed by a collateral agent
agreement, security agreement and intercreditor agreement. For additional
information, see our Current Reports on Form 8-K filed on February 15, 2005
and
March 16, 2005.

-36-

Transactions
Involving Leonid Frenkel and his Affiliates

Through
the filing of a Schedule 13G on October 1, 2004, Triage Management L.P. and
Leonid Frenkel first reported their beneficial ownership of more than 5% our
outstanding shares of common stock. In addition to the subscription of 10%
senior secured convertible notes described above, we entered into a repurchase
agreement with Leonid Frenkel, Triage Capital Management B, LP, Triage Capital
Management LP, Triage Offshore Fund Ltd and Periscope Partners LP whereby we
repurchased an aggregate of 448,053 shares of common stock in exchange for
warrants to purchase an aggregate of 448,053 shares of common stock with an
exercise price of $.01 per share. The repurchased shares have been classified
as
treasury shares. For additional information, see our Current Report on Form
8-K
filed on April 14, 2005.

Securities
and Exchange Commission Position on Certain
Indemnification

Our
articles of incorporation obligate us to indemnify our directors and officers
to
the fullest extent permitted under Nevada law. Chapter 78 of the Nevada Revised
Statutes, or NRS, provides for indemnification by a corporation of costs
incurred by directors, employees, and agents in connection with an action,
suit,
or proceeding brought by reason of their position as a director, employee,
or
agent. The person being indemnified must have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of
the corporation.

Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
or
the Securities Act, may be permitted to our directors, officers or persons
controlling us pursuant to the provisions contained in our amended and restated
articles of incorporation, our amended and restated bylaws, Nevada law or
otherwise, we have been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act
of
1933 and is therefore unenforceable. If a claim for indemnification against
such
liabilities, other than the payment by us of expenses incurred or paid by one
of
our directors, officers or controlling persons in the successful defense of
any
action, suit, or proceeding, is asserted by such director, officer or
controlling person, we will, unless in the opinion of our counsel the matter
has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of this issue.

Indemnification
Agreements

In
June
2003, July 2003, July 2005, and November 2005 we entered into indemnification
agreements with members of our board of directors and certain of significant
and
other employees in which we agreed to hold harmless and indemnify such
directors, officers and employees to the fullest extent authorized under Nevada
law, and to pay any and all related expenses reasonably incurred by the
indemnitee. The relevant members of our board of directors are James E. Crabbe,
Ronald O. Keil, Mark R. Newburg Bob L. Smith, Vincent L. DiVito, Paul A.
Harvey and Robert L. Miodonski. The relevant significant and other employees
are: D. Dean Barnett, Vice President of Sales; Joseph D. Corradino,
Director of Sales/Table Games; Kenneth R. Dickinson, Vice President of
Engineering; and Robert G. Pietrosanto, Vice President of Sales. In
addition, Indemnification Agreements are being processed for Arnaldo F. Galassi,
Secretary and Chief Financial Officer; Simon B. Herbert, Vice President of
International Sales; and Peter Zee, Senior Vice President of Engineering and
Production.

ITEM 13.EXHIBITS

The
exhibits to this Annual Report on Form 10-KSB are listed in the Exhibit Index
contained at the end of this report. The Exhibit Index indicates each management
contract or compensatory plan or arrangement required to be filed as an exhibit
to this Annual Report on Form 10-KSB.

-37-

ITEM
14.PRINCIPAL
ACCOUNTING FEES AND SERVICES

Piercy
Bowler Taylor & Kern, Certified Public Accountants, Las Vegas, Nevada, or
PBTK, served as our independent public accountants and auditors for fiscal
years
ended December 31, 2005 and 2004.

Our
board
is responsible for pre-approving all audit and permissible non-audit services
provided by our independent auditor, PBTK, with certain limited exceptions.
Our
board of directors has concluded that the non-audit services provided by PBTK
are compatible with maintaining auditor independence. In 2005 and 2004, no
fees
were paid to PBTK pursuant to the “de minimus” exception to the pre-approval
policy permitted under the Securities Exchange Act of 1934, as
amended.

For
the
fiscal years ended December 31, 2005 and 2004, the fees for services billed
by
PBTK were as follows:

2005

2004

Audit
fees

$

104,059

$

98,547

Audit-related
fees

5,280

4,923

Tax
fees

13,970

21,970

All
other fees

36,328

2,300

$

159,637

$

127,740

Audit
fees generally included fees related to the audit of our annual financial
statements included in our Form 10-KSB’s, the review of our interim financial
statements included in our Form 10-QSB’s and the consents and assistance in
connection with other filings and public offering documents filed with the
Securities and Exchange Commission.

Audit
related fees generally included fees for assurance and related services that
are
reasonably related to the performance of the audit or review of our financial
statements, such as accounting consultations concerning financial accounting
and
reporting standards, internal control reviews and other non-statutory
attestation services.

Tax
fees
generally included fees for professional services rendered with respect to
tax
compliance, tax advice and tax planning, such as the preparation of tax returns,
claims for refunds, payment planning and tax law interpretation.

All
other
fees generally included fees related to miscellaneous, non-recurring
engagements In 2004 other fees billed by PBTK represented research related
to Generally Accepted Accounting Principles. In 2005 other fees billed by PBTK
represented research related to Generally Accepted Accounting Principles and
fees associated with restatement of financials related to the 10QSB for March
31, 2004, June 30, 2004, September 30, 2004, March 31, 2005, June 30, 2005
and
the Decemer 31, 2004 10KSB..

-38-

SIGNATURES

In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly
caused this report to be signed on our behalf by the undersigned, thereunto
duly
authorized.

VENDINGDATA
CORPORATION

Date:
March 30, 2006

By:

/s/
Mark R. Newburg

Mark
R. Newburg, Chief Executive Officer, Principal Executive
Officer

In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.

Signature

Title

Date

/s/
Mark
R. Newburg

Executive
Director

March
30, 2006

Mark
R. Newburg

(Chief
Executive Officer)

/s/
Arnaldo
F. Galassi

Chief
Financial Officer

March
30, 2006

Arnaldo
F. Galassi

(Principal
Financial and Accounting Officer)

/s/
James
E. Crabbe

Chairman
of the Board

March
30, 2006

James
E. Crabbe

/s/
Ronald
O. Keil

Director

March
30, 2006

Ronald
O. Keil

/s/
Bob
L. Smith

Director

March
30, 2006

Bob
L. Smith

/s/
Paul
Harvey

Director

March
20, 2006

Paul
Harvey

/s/
Vincent
Devito

Director

March
20, 2006

Vincent
Devito

/s/
Robert
Miodonski

Director

March
30, 2006

Robert
Miodonski

-39-

INDEX
TO FINANCIAL STATEMENT

Report
of Independent Registered Public Accounting Firm

F-2

Balance
Sheets at December 31, 2005 and 2004

F-3

Statements
of Operations for the Years Ended December 31, 2005 and
2004

F-4

Statements
of Changes in Stockholders’ Equity for the Years Ended December31, 2005
and 2004

F-6

Statements
of Cash Flows for the Years Ended December 31, 2005 and
2004

F-6

Notes
to Financial Statements

F-7

F-1

REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of
Directors and Stockholders

VendingData
Corporation

We
have
audited the balance sheets of VendingData Corporation as of December 31, 2005
and 2004, and the related statements of operations, changes in stockholders’
equity, and cash flows for the years then ended. These financial statements
are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, audits of its internal control
over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.An
audit
also includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.

In
our
opinion, the financial statements referred to above, present fairly, in all
material respects, the financial position of VendingData Corporation as of
December 31, 2005 and 2004, and the results of its operations and cash flows
for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.

/s/
Piercy
Bowler Taylor & Kern

Piercy
Bowler Taylor & Kern

Certified
Public Accountants and Business
Advisors

Las
Vegas, Nevada

February
28, 2006

F-2

VENDINGDATA
CORPORATION

Balance
Sheets

December
31, 2005 and 2004

ASSETS

2005

2004

Current
assets:

Cash
and cash equivalents

$

935,243

$

924,802

Current
portion of accounts receivable, trade net of allowance for

uncollectibles
of $276,420 and 125,530

1,550,559

1,596,017

Due
from affiliate

4,098

25,000

Prepaid
expenses and other receivables

113,557

121,969

Inventories

3,045,334

6,124,171

5,648,791

8,791,959

Accounts
receivable, trade, net of current portion, less unamortized
discount

600,430

1,264,914

Equipment
rented to customers, net of

accumulated
depreciation of $228,032 and $316,245

146,527

400,594

Property
and equipment, at cost, net of

accumulated
depreciation of $2,408,234and $1,859,206

585,431

923,459

Intangible
assets, at cost, net of

accumulated
amortization of $836,281and $288,203

1,862,268

1,129,644

Due
from affiliate

—

118,800

Deferred
costs

748,171

753,030

Deposits

759,653

980,216

$

10,351,271

$

14,362,616

LIABILITIES
AND STOCKHOLDERS’ EQUITY

Current
liabilities:

Capital
leases payable, current portion

$

471,269

$

1,941,445

Accounts
payable

1,836,234

1,240,676

Accrued
expenses

794,203

427,199

Deferred
revenues, current portion

52,248

239,680

Short-term
debt

4,050,000

238,250

Customer
deposits

81,858

193,615

7,285,812

4,280,865

Deferred
revenues, net of current portion

161,335

198,585

Notes
payable, net of current portion

11,654,500

3,250,000

Capital
leases payable, net of current portion

421,975

893,244

19,523,622

8,622,694

Stockholders’
equity:

Preferred
stock, $.001 par value, 10,000,000 shares authorized

—

—

Common
stock, $.001 par value, 50,000,000 shares authorized

17,741,511
and 17,312,058 share issued and outstanding

18,142

17,200

Additional
paid-in capital

66,763,192

59,843,270

Treasury
stock 448,053 shares at cost

(846,820

)

0

Deferred
expense

(3,419,088

)

0

Deficit

(71,687,777

)

(54,120,547

)

Total
stockholder’s equity (deficiency)

(9,172,351

)

5,739,923

Total
liabilities and stockholders’ equity (deficiency)

$

10,351,271

$

14,362,617

See
accompanying notes to financial statement

F-3

VENDINGDATA
CORPORATION

Statements
of Operations

Years
Ended December 31, 2005 and 2004

Year
Ended December
31,

2005

2004

Sales

$

2,302,484

$

2,648,684

Rental

519,635

616,714

Other

278,619

171,162

3,100,738

3,436,560

Less
sales returns and allowances

(739,263

)

0

Net
sales

2,361,475

3,436,560

Operating
costs and expenses:

Cost
of sales

7,736,066

3,570,070

Selling,
general and administrative

9,220,636

7,046,005

Research
and development

1,394,006

1,423,096

18,350,708

12,039,171

Loss
from operations

(15,989,233

)

(
8,602,611

)

Interest
expense, including $15,063 and $31,974 to related parties

1,577,996

935,589

Net
loss

$

(17,567,230

)

$

(9,538,200

)

Basic
loss per share

$

(1.03

)

$

(0.55

)

Weighted
average shares outstanding

17,050,398

17,187,664

See
accompanying notes to financial statements.

F-4

VENDINGDATA
CORPORATION

Statements
of Changes in Stockholders’ Equity

Years
Ended December 31, 2005 and 2004

Additional

Common
Shares

Paid-in

Treasury

Deferred

Activity

Stock

Dollars

Capital

stock

expense

Deficit

Total

BalancesJanuary 1,
2004

16,765,580

$

16,766

$

58,810,806

$

(44,582,347

)

$

14,245,225

Exercise
of employee options

1,360

2

2,380

2,382

Stock
issued for conversion of debt

362,218

362

814,566

814,928

Exercise
of warrants

70,400

70

70

Repayment
for stock issue Expenses

36,731

36,731

Employee
options issued

178,790

178,790

Net
loss for 2004

(9,538,200

)

(9,538,200

)

Balances,
December 31, 2004

17,199,558

17,200

59,843,273

(54,120,547

)

5,739,926

Exercise
of employee options

70,000

70

130,080

130,150

Stock
issued for conversion of debt

209,393

209

345,290

345,499

Shares
issued for deferred compensation

4,129,903

1

(3,419,088

)

710,815

Acquisition
of stock for warrants

1,143,570

(846,820

)

296,750

Exercise
of warrants

162,500

163

418,576

418,739

Stock
issued for services

100,000

100

152,900

153,000

Sale
of shares

400

2

599,600

600,000

Net
loss for 2005

(17,567,230

)

(17,567,230

)

Balances,
December 31, 2005

17,741,451

$

18,142

$

66,763,192

$(846,820

)

$(3,419,088

)

$

(71,687,777

)

$

(9,173,351

)

1

Includes
75,000 stock options at $126,000 that were issued and subsequently
cancelled within the year 2005. A total of 1,419,590 stock options
were
cancelled during 2005.

2

400,000
shares were issued in the first quarter of 2006, proceeds were received
in
2005.

See
accompanying notes to financial statements.

F-5

VENDINGDATA
CORPORATION

Statements
of Cash Flows

Years
Ended December 31, 2005 and 2004

December
31,

2005

2004

Net
cash used in operating activities

$

(14,816,322

)

$

(10,660,135

)

Cash
flows from investing activities:

Acquisition
of property and equipment

(1,312,937

)

(271,261

)

Disposition
of equipment produced for rental

(42,138

)

Proceeds
from sale of plant and equipment

21,200

Acquisition
of intangible assets

(4,900

)

Net
cash used in investing activities

(1,333,875

)

(
276,161

)

Cash
flows from financing activities:

Reimbursement
of offering expense

—

36,731

Proceeds
from sale of stock, warrants and options

5,728,545

2,380

Proceeds
from capital leases financing

—

723,839

Repayment
of capital leases

(2,129,657

)

(2,042,946

)

Acquisition
of treasury stock

—

Proceeds
from issuance of convertible debt

12,750,000

3,250,000

Repayment
of convertible and other debt

188,250

(1,635,570

)

Net
cash provided by financing activities

16,160,638

334,434

Increase
(decrease) in cash and cash equivalents

10,441

(10,601,862

)

Cash
and cash equivalents, beginning of year

924,602

11,526,664

Cash
and cash equivalents, end of year

$

935,243

$

924,802

See
accompanying notes to financial statements.

F-6

VENDINGDATA
CORPORATION

NOTES
TO FINANCIAL STATEMENTS

Note
1.Description
of Business and Significant Accounting Policies

The
Company is in the business of developing and distributing products related
to
the gaming industry. The Company’s principal products are electronic card
shuffling devices and RFID casino chips. The Company operates principally in
the
United States of America, however, a portion of its revenues are derived from
sales to customers in foreign countries.

The
Company manages its credit risk by evaluating the creditworthiness of customers
before credit is extended and monitoring it thereafter. The maximum losses
that
the Company would incur if a customer failed to pay amounts owed would be
limited to the recorded receivables after any allowances provided.

Cash
equivalents

All
highly liquid debt instruments with an original maturity of three months or
less
are considered cash equivalents.

Estimates

The
preparation of the Company’s financial statements requires management to make
estimates that affect the amounts reported in the financial statements and
accompanying notes which estimates may require revision in future financial
statements.

Inventory

Inventory
is stated at the lower of cost, determined using the first in, first out method,
or market.

Property
and equipment

Property
and equipment (Note 4), and equipment rented to customers are carried at
cost. Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the assets of 3-5 years, which, in the case
of leasehold improvements is limited to the life of the lease and renewal
period, so long as renewal is intended.

Intangible
assets

Patent
and trademark costs (Note 5) are amortized using the straight-line method
over an appropriate estimated useful life pursuant to SFAS No. 142,
Goodwill
and Other Intangible Assets.
The
Company amortizes these intangible assets on a straight-line basis over
currently estimated useful lives of 10 years.

Fair
value of financial instruments

The
Company’s financial instruments consist of cash and cash equivalents, accounts
and loans receivable, and accounts payable and accruals. Management believes
the
carrying amounts of these financial instruments approximate fair value because
of their short-term maturities or interest yields that approximate market rates.

F-7

Revenue
recognition

We
recognize revenue from the sale of our shuffler and Deck Checker™ products upon
shipment against valid customer contracts or purchase orders. Sales are
recognized immediately when shufflers that are rented are converted to purchases
depending on the creditworthiness and payment history of the casino company
since payment terms are from 20 to 48 months. We recognize revenue from our
sales to independent distributors at the time that the distributor takes
possession of our product and title transfers to the buyer. The extended
warranty and maintenance components that are part of long term sales contracts
are unbundled and recognized as deferred revenue amortized over the remaining
life of the sales agreement after the initial 90−day warranty as required by
Emerging Issues Task Force Issue No. 00−21, Revenue
Arrangements with Multiple Deliverables.
The
estimated useful life of our shufflers and Deck Checkers™ is five years with
proper maintenance; the life can be extended with the replacement of certain
component parts. If the customer does not possess the required creditworthiness,
the revenue is recorded as an installment sale and recognized over time as
payments are received. Revenue from shuffler rentals is recorded monthly in
accordance with rental contract terms. All rental contracts are cancelable
upon
30−day written notice by the customer. Maintenance expense for rental units is
recorded in the period it is incurred. Although sales are generally made with
a
right of return, such returns are usually associated with unacceptable
performance, therefore, sales returns and allowances are not provided for based
on estimates but rather recorded after returned goods are received and
inspected. The Company provides currently for estimated warranty repair costs
associated with sales contracts. Although there are no extended warranties
offered for our products, we do provide for maintenance contracts that are
billed and recognized on a monthly basis over the life of the
contract.

Advertising

Advertising
costs are charged to selling, general and administrative expenses when incurred
and were $61,460 and $33,837 for 2005 and 2004, respectively.

In
December, 2004, the SFAS No. 123 (Revised 2004), Share
Based Payment
(“SFAS
123R”) requires certain changes in the way compensation cost related to share
based employee compensation transactions is recognized in the financial
statements as compared to SFAS No. 123 effective for the Company as of January
1, 2006.

Legal
defense costs

The
Company does not accrue for future litigation defense costs, if any, to be
incurred by the Company in connection with outstanding litigation and other
disputed matters but, instead, records such costs as the related legal and
other
services are rendered.

Loss
per share

Basic
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the year. No diluted loss per
share
is presented since the assumed exercise of common stock equivalents would have
an anti-dilutive effect due to the losses.

Warranties

As
part
of the normal sale of its products, the Company has provided its customers
with
product warranties. Management determines the warranty accrual on each sale
based on known product failure rates of key components, historical experience,
service staff costs and other variables that affect the liability.

F-8

Note
2.Segments

The
segments identified for geographic region-based enterprise-wide data are as
follows:

Year
Ended

December 31,
2005

Year
Ended

December 31,
2004

Revenue

Long-lived

Assets

Revenue

Long-lived

Assets

North
America

$

2,590,904

$

4,035,933

$

1,997,832

$

2,643,866

Asia

—

550,198

962,775

530,025

Europe

501,584

—

187,666

—

South
America

8,250

—

—

—

Australia

—

—

288,287

—

The
Company’s revenues distributed by product are as follows:

Year
Ended

December 31,
2005

Year
Ended

December 31,
2004

Shufflers

Deck
Checkers™

SecureDrop®

Shufflers

Deck
Checkers™

SecureDrop®

$1,589,932

$

1,101,852

$

130,335

$

1,526,000

$

1,594,399

$

144,999

Note
3.Inventory

Inventory
consisted of the following at December 31, 2005 and 2004.

December 31,
2005

December 31,
2004

Raw
material

$

824,759

$

2,616,731

Work
in progress

66,024

1,391,467

Finished
goods

2,154,551

2,115,973

$

3,045,334

$

6,124,171

Note
4.Property
and Equipment

Property
and equipment, excluding equipment rented to customers, consists of the
following at December 31, 2005 and 2004:

December
31, 2005

December 31,
2004

Equipment
and vehicles, furniture and fixtures

$

1,990,463

$

1,983,744

Tooling

858,720

768,280

Leasehold
improvements

500,093

421,867

3,349,276

3,173,891

Less
accumulated depreciation and amortization

2,763,845

2,250,432

$

585,431

$

923,459

A
substantial portion of the Company’s furniture and equipment are held under
capital leases (Note 7).

F-9

Note
5.
Intangible assets

The
Company acquired the patent rights for the Deck Checker™ for $1,004,900 in 2003.
The following table sets forth the estimated aggregate amortization of these
and
other intangible asset costs for the next five years:

2006

$
156,813

2007

$
141,286

2008

$
138,829

2009

$
134,985

2010

$
125,623

The
Company acquired the patent rights for the ChipWasher and DeckSetter™ for
$566,000 in 2005. The following table sets forth the estimated aggregate
amortization of these and other intangible asset costs for the next five
years:

2006

$56,600

2007

$56,600

2008

$56,600

2009

$56,600

2010

$56,600

The
Company acquired the patent rights from Dolphin for the high frequency RFID
casino chip for $750,000 in 2005. The following table sets forth the estimated
aggregate amortization of these and other intangible asset costs for the next
five years:

2006

$75,000

2007

$75,000

2008

$75,000

2009

$75,000

2010

$75,000

Note
6. Short Term Debt

On
October 6, 2005, we negotiated a one year revolving credit facility in the
amount of $5,000,000 and carrying an interest rate of 9.0%. The facility is
secured by receivables. As of December 31, 2005, we had borrowed $4,000,000
under the credit line.

F-10

Note
7.
Convertible
Debt with Warrants and Leases Payable

As
of
December 31, 2005 and 2004, our long-term obligations consist of
convertible notes and capital lease obligations as follows:

December 31,

2005

December 31,

2004

10.0%
notes, of which 50% are convertible due August 15, 2008, secured
by trade
receivables and inventory. The notes are convertible at $1.65 per
share of
common stock for 50% of the note principal amount